Maturity of bonds worries real estate companies | Economy

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Capital demand

The years between 2019 and 2021 have seen a boom in the corporate bond market with a huge increase in issuance. During these three years, the issue value reached almost VND 1,600 trillion, or 64% of the total issues from 2005 to 2022, leading to an increase in GDP of 7.3% in 2018 to almost 18.9% in 2021. In terms of industry structure, banking and real estate accounted for the largest share of corporate bond issuance, up to 65% by value and 60% by number of emissions, over the period 2005 to 2022. Both of these industries are in constant need of large amounts of capital.

Real estate companies actively issued corporate bonds in the period 2019 to 2021 due to the difficulty of accessing loans from the banking system, when the State Bank of Vietnam made clear its policy of strict supervision of the real estate credit. In addition, many real estate companies did not meet banks’ borrowing requirements and turned to high-interest corporate bonds that did not require collateral. They were also subject to supervision of money disbursement activities such as borrowing from banks.

After a period of strong growth, corporate bond issuance in the first six months of 2022 suddenly fell sharply. The sharp decline in issuance volume in the second quarter was due to the government’s firm stance on the financial market and the influence of the Tan Hoang Minh event. In the second quarter, the issue volume reached 119 trillion VND, down 45% from the same period. In particular, the real estate group continued to rank second in terms of total issue value, despite a sharp decline over the same period. However, excluding more than $500 million of international bonds issued by Vingroup, the issue value in the second quarter was only 16% over the same period.

Bond maturity pressure

Real estate companies strongly encouraged bond issuance during 2019 to 2021, which has now increased the maturity pressure in 2022 to 2026. According to KB Securities Vietnam (KBSV) estimates, the total value at maturity of the corporate bonds will reach 374,300 VND. billion in 2023 and VND 381.2 trillion in 2024. In this field, the real estate group represents the second largest part. Consequently, companies face challenges in raising capital to repay their debts. One of the plans considered by the companies is to raise capital by issuing new bonds to pay off old debts. However, the implementation of this plan is not easy, as several difficulties can arise from policies and real needs.

Recently, the 5th draft amendment to Decree 153/2020/ND-CP regulating the supply of corporate bonds was published, with changes in the direction of further tightening for issuers and investors. The first is the decision to prohibit companies from issuing bonds to provide capital in the form of equity contributions or purchases of shares in other companies, or from lending capital to other companies.

Then, it is necessary that the total outstanding debt of bonds does not exceed three times the equity if the business activities of the previous year were profitable and there is no accumulated loss. Another strict requirement for professional investors is that individuals can only buy individual bonds issued by public companies and must have collateral or payment guarantees. If this project is approved, it will limit access to bank credit to companies that have financial difficulties and will not be able to issue individual bonds.

Impact of the recession

From the end of this year until 2023 and 2024, it will not be an easy time in terms of cash flow for real estate companies with mature obligations. Small and medium-sized enterprises with low-quality assets will face many difficulties in finding capital to renew. These companies are facing difficulties due to three factors, namely the difficulty in accessing bank loans, the capital crunch from the issuance of bonds and the absorption of the real estate market in 2023 and 2024 not being not high due to the impact of the economic recession.

On the other hand, the large group of real estate companies is a little less under pressure due to a large land reserve and guarantees to borrow from banks, while being eligible to issue new bonds and able to borrow international obligations. However, these companies still need to continually accumulate and deploy new projects, despite periods of rapid market growth and high valuations, in order to leverage more sources of debt to supplement cash flow to pay obligations due. It will also cause cash flow imbalance and reduce operational efficiency in future years.

Recently, the State Bank of Vietnam expanded the credit line of the banking system to meet the credit growth target of 14% in 2022. This decision will partly have a positive impact on the cash flow of real estate companies according to two corners. First, businesses have new sources of money to borrow against debt owed. However, this option is only applicable to companies with new projects and good quality assets. Second, the real estate market is expected to heat up again in the final months of the year as credit flows clear and companies can destock and have more money to pay off debt.

With rising inflation, the tendency to raise interest rates is becoming common in countries around the world. Vietnam should struggle to avoid the general trend of easing pressure on the exchange rate. However, high interest rates will directly affect the cost of real estate investment capital for businesses as well as individuals. This will lead to a decrease in the absorptive capacity of the market while the accumulated inventory is still very large.

Saigon Investment

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