Nearly half of corporate bonds do not have collateral

Corporate bonds have many potential risks. Source: Internet

Some hidden risks

For collaterals of bonds, among the private placement of corporate bonds issued in the first months of 2021, bonds with collateral accounted for 50.9%. Bonds without collateral accounted for 49.1%, of which bonds issued by credit institutions and securities companies accounted for 76%.

Among 300 companies that issued private placement bonds in the first months of 2021, 207 companies issued bonds with collateral. Collaterals of bonds mainly include real estate, securities, programs and projects.

Although the percentage of bonds with collateral is high, the quality of the collateral is mainly in projects and assets formed in the future, or shares of enterprises. The value of these assets is often not accurately valued or fluctuates sharply following to market movements. Accordingly, in case the real estate market or the stock market fluctuates, the value of the collateral may not be enough to pay the principal interest of the bond.

"Besides that, the collaterals of bonds could be used to guarantee loans and other bond issuances of enterprises, so investors needed to carefully evaluate these risks," the Ministry of Finance said.

For issuers in the market, there were still cases where enterprises issued corporate bonds with both a large volume and small equity, resulting in loss of results over the years.

Especially for the real estate group, among more than 100 real estate enterprises that issued private placement bonds in 2021, 26 enterprises recorded losses in the first six months of 2021. As of June 30, 2021, the average debt-to-equity ratio of listed real estate companies was 2:5, while the ratio of unlisted real estate companies was 8:1.

Carefully assess the risk before "putting money down"

For investors, statistics showed that professional individual investors tended to reduce purchases on the primary market of private placement corporate bonds, however, in the secondary market, the holding rate of private investment investors was still very high.

According to the Ministry of Finance, the Law on Securities, the Law on Enterprises and the decrees on corporate bond issuance clearly stipulated that only professional securities investors could buy and trade private placement corporate bonds.

Therefore, before considering buying private placement corporate bonds, investors need to study the regulations and penalties for violations of professional securities investors.

When being introduced to private placement corporate bonds, investors need to ask the issuing company or the distributing organization to provide complete and accurate information on the financial situation of the issuing company, the purpose of issuing bonds, collaterals and characteristics and rights and obligations of bondholders.

In addition, after buying bonds investors need to regularly update their financial situation, their debt repayment capacity and whether the use of capital raised from bonds is suitable for the purpose.

“Only when information about bonds is known, fully assessed and carefully considered can investors make a decision to buy bonds or not. Individual investors should not buy private placement corporate bonds if they do not have the ability and resources to fully assess the risks of the bonds, closely follow the disbursement progress, the purpose of capital use, and the financial situation of issuance enterprises after buying bonds”, the Ministry of Finance recommended.

The Ministry of Finance also recommends that investors pay close attention to the basic investment principle that high interest rates would be accompanied by high risks. Therefore, they must carefully evaluate the risks before deciding to buy bonds and should not buy bonds through the offers of service providers without carefully understanding the financial situation of the issuer and the terms and conditions of the bonds.

Investors should also note that credit institutions and securities companies that distribute corporate bonds would not guarantee the safety of bond purchases. These organizations are only service providers, enjoying service fees from the issuer without being responsible for the appraisal/assessment of the issuer's financial position and debt repayment ability. Therefore, they were not responsible for whether the enterprise would repay the principal and interest of the bond. The risk of bond purchases are still at the risk of the buyer.