Corporate bonds financing real estate companies | Business

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However, real estate companies quickly entered the corporate bond market, while banks rushed to this market to buy real estate bonds.

Using loopholes

The total amount of corporate bonds issued in the last nine months of 2021 has been valued at VND 443.1 trillion, up 18.6% from the same period in 2020. The winners have been real estate companies with 201.900 billion VND, or 45.5%; followed by the banking group with 136,400 billion VND, or 30.8%.

This situation not only happened in the last nine months of this year, but has continued for several consecutive years. Real estate companies have been rushing to issue corporate bonds since the State Bank of Vietnam issued regulations to tighten the short-term capital ratio for medium and long-term loans in the commercial banks, which increased the risk coefficient for mortgage lending to limit the flow of capital in this sector. Companies therefore want to find capital, and this is the only way to redirect the mobilization of capital to the corporate bond market.

Real estate companies that raise capital through any channel have used commercial banks to do so. According to the Finn Group, in the last nine months of 2021, more than 80% of the value of corporate bonds issued by the residential real estate sector were owned by unlisted companies. Most of these companies issue private placements to the main buyers, which are banks and brokerage firms. Behind the huge increase in the number of real estate bonds lie ways for banks to bypass home loans without worrying about showing credit on the books, and capital adequacy ratios are always guaranteed with high profits and without the need to build up provisions.

Currently, commercial banks and brokerage firms hold almost 60% of corporate bonds issued. In the past nine months, commercial banks have bought VND 124.4 trillion in bonds, or 27.3%, mostly from real estate companies. This explains why credit to real estate activity is low, but the operating capital of companies is still abundant.

Job change

In the coming time, there may be a change in position in the corporate bond market, after the State Bank of Vietnam issued Circular 16/2021 / TT-NHNN aimed at tightening up buying and the sale of corporate bonds by credit institutions and branches of foreign banks. This is a remarkable development after the publication of new regulations on November 22 and the sharp drop in the shares of many large real estate companies. At the same time, small and mid-sized real estate values ​​were also sold heavily at floor prices. This is believed to stem from the response to Circular 16.

First of all, the number of corporate real estate bonds is constantly increasing, while the debt repayment capacity of unlisted real estate issuers is very low. The loan repayment capacity and leverage index of this real estate group is at an alarming level. The leverage ratio in June of unlisted real estate companies is 8.1 times and that of listed companies is 2.5 times. If calculated until the end of September, the level of leverage may be even higher when the value of newly issued bonds of unlisted real estate companies has reached around 100,000 billion VND, or 38% of the total. assets at the end of 2020. According to one estimate, the ideal leverage ratio is 1/1, or 1 dong of debt for 1 dong of capital. Level 2/1 is acceptable, 3/1 is quite high, 4/1 is very high risk, and level 5/1 is at risk of bankruptcy.

Second, after the effects of the Covid-19 pandemic, besides the real estate group, issuing corporate bonds to restructure debt may become a widely applied trick. In addition to the primary reason for helping companies invest in expanding their businesses, companies can also issue new corporate bonds to pay off debts from old corporate bonds or to repay loans from companies. Credit institutions. In such cases, the banks ‘balance sheets will not be factual and the State Bank of Vietnam will not be able to manage the banks’ credit. Banks that buy corporate bonds also do not need to provision these bad debts according to circulars 02 and 09 in order not to affect profits. This will cover bad debts.

Unpredictable risks

The tightening of credit institutions to buy corporate bonds is nothing new. In 2018, the State Bank of Vietnam amended and supplemented a number of articles of Circular 22/2016 relating to the purchase of corporate bonds by credit institutions. This regulation forced banks to buy corporate bonds in potentially high-risk areas and, at the same time, obliged credit institutions not to buy corporate bonds issued with the aim of restructuring the market. corporate debt.

At that time, bad debts of businesses were quite complicated and there was a phenomenon of converting bad debts into corporate bonds for debt settlement as well as for banks to reduce bad debt rate. Bad debts are replaced by corporate bonds and the repayment term is also restructured as corporate bonds are issued for terms of up to five years, ten years, or even fifteen years. After the warning bell sounded, the governing body issued the above regulations. Today, the State Bank of Vietnam again stipulated similar issues, showing that the compliance of banks and businesses in general as well as real estate companies in particular is still not serious.

For a long time, commercial banks have been a financial intermediary providing more than 70% of the capital to the economy but mainly mobilized by short-term capital. Therefore, the corporate bond market should replace the burden of providing capital for the banking channel, but the reality is not as expected. When the burden of medium and long term lending was eased, commercial banks quickly bought bonds to inject capital into many businesses, including real estate businesses. This is contrary to the wishes of the regulators and hides behind many unforeseeable risks for the financial markets and the economy.

Banks have been injecting capital into businesses for many years. Whether this new regulation can somehow change this flow of capital, the question remains open as banks follow the trend to tie up securities firms, businesses and banks. As a result, banks will not buy directly in accordance with the regulations of the State Bank of Vietnam, but it is still possible to allow units to buy and sell corporate bonds.

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