Need to identify and analyse risks before investing in corporate bonds

Nguyen Hoang Duong, Deputy Director of Department of Banking and Financial institutions (Ministry of Finance)

Corporate bonds reduce pressure on capital supply

According to Nguyen Hoang Duong, the goal of developing the corporate bond market was to create a balance between the bank credit market – a traditional capital supply channel of Vietnam's financial market and the capital mobilization channel through capital markets.

"The capital market was a medium and long-term market, if we developed the capital market, it would reduce pressure on capital supply for the economy from the system of credit institutions," Duong said.

However, according to Duong, Vietnam's corporate bond market had made rapid development steps, which was a very good trend. However, along with that development, the management authority, as well as the market, needed to pay attention to new risks arising, as well as concerns in market management and supervision.

The Ministry of Finance had made great efforts to perfect the system of legal documents related to the development of the bond market. Accordingly, the Ministry has submitted to the Prime Minister a roadmap for bond market development, submitted to the Government for promulgating the Decrees on corporate bonds appropriate with each period and accompanied by management solutions as well as other market development solutions.

The Ministry of Finance has also actively created channels to provide information to investors. Specifically, since the promulgation of Decree No. 163/ND-CP on the issuance of corporate bonds, the Hanoi Stock Exchange (HNX) has established a corporate bond portal on HNX. Thus, investors could find information related to corporate bonds that had not been presented before, especially for individual corporate bonds.

Regarding the role of investors and the reason why it is important to distinguish the issuance of corporate bonds in terms of public offering and private placement, Duong said that for capital market development, the development of the investor base was very important and the diversification of types of investors participating in the market would help the market to develop.

However, investors all had different tastes in investment and risk tolerance, so each type of investor would have appropriate investment products and progress of legal framework completion for Vietnam's corporate bond market was also associated with this development.

New legal framework to reduce risks

To clarify this issue, Nguyen Hoang Duong said that, previously, under the provisions of the Law on Securities 2010, non-professional individual investors were also allowed to invest in private placement corporate bonds.

“But when the market had rapid development and a large number of individual investors participated, we assessed that there would be risks if investors were not able to fully assess the risks of corporate bonds, especially small individual investors. Therefore, the regulator had materialized a new policy into the Law on Securities 2020, accordingly, the private placement of corporate bonds would only be available to professional securities investors who were able to evaluate the risks in investment. Meanwhile, the public offering is for all public investors," Duong said.

The information about regulations on two types of offering of corporate bonds, Duong said, the public offering would be assessed by state management authorities, specifically the State Securities Commission, for approval of the offering.

Conditions for public offering of bonds required enterprises to be profitable, buyers included both professional and non-professional investors, professional individuals and non-professional individuals.

According to the provisions of the Law on Securities 2020, since January 1, 2023, public offering bonds were required to have a credit rating. After the bond was issued, it would be listed and traded on the stock market.

In terms of private placement, the state management authority did not license the offering public bond, limiting only professional securities investors to buy and trade bonds individually.

The offering of private placement bonds must be advised by the securities company and the issuing enterprise must meet the issuance conditions, disclose information fully in accordance with the regulations, and especially disclose information about the purpose of capital mobilization.

In addition, the new legal framework also clearly stipulated three subjects who are professional investors, and the level of penalties for violations on professional securities investment.

Regarding the development of the corporate bond market in the future, there might be risks because individual investors participated too much and businesses issued too many corporate bonds. If the market fluctuated, businesses faced difficulties, and large debt would be ahead, Duong said. To handle the risks of the market, it needed to bring the right investors to approach the right risk appetite.

"I think that when investors are trained to understand and identify risks if a company is not good enough to issue bonds and offer only high interest rates, investors will not invest," Duong said.

He also said that for professional investors including banks, securities companies, and investment funds, even though the issuing company could raise interest rates, no matter how high the interest rate is, they still had to follow a risk assessment process to decide to buy corporate bonds.

Thus, the concerning subject is the individual investor. They still bought bonds although they did not know about that bond and enterprises could still issue bonds. As a consequence, the debt would accumulate and grow higher.

Therefore, from the perspective of the state management authority, Duong said that individual investors needed to have skills to identify and analyse risks before participating in financial products investment in general and corporate bond products in particular.