Vietnam Corporate Bond Market has been growing rapidly over the last few years. Total outstanding bonds as of 30th September 2020 reached 16.9% GDP of which 95% was issued via private placements. Furthermore, the increasing participation of individual investors and various regulations and policy coming into effect from 1th Jan 2021 have raised the need for independent credit rating agencies to provide creditworthiness opinions of corporate issuers and their instruments issued to public especially prior to their public offerings.
As part of implementing these new regulations and market education for the credit ratings services in Vietnam, the Ministry of Finance of Vietnam (MOF) with support from Asia Development Bank, held the Seminar on Developing Credit Ratings Service for Vietnam at the Hochiminh Stock Exchange Tower in HCMC on 16 November 2020.
As a Vietnam licensed credit rating agency, FiinGroup was invited to discuss about the rating methodology and how Fiin Ratings, a division of FiinGroup, will help further develop Vietnam corporate bond market in particular and Vietnam capital markets in general.
Here are the key takeaways from the seminar:
New regulations on credit rating for corporate bonds (C-bonds) issuance
- The Securities Law (2019) stipulates that credit rating is required for public offerings of C-bonds as an effort to promote the healthy development of the Vietnam corporate bond market, at the same time, the guidance on detailed requirements and effective time is assigned to the Prime Minister.
- The Ministry of Finance of Vietnam (MOF) and related regulators are currently in the process of drafting the Decree on the Implementation of the Securities Law (2019), Decrees on the Private placement of C-bonds as well as Circulars related to Corporate bond Investment. Accordingly, the drafted Decree stipulates conditions where issuers of public C-bonds must be rated, inclduing the following cases:
- The total value at par of outstanding bonds by the time of offering is greater than 100% of its equity based on the latest annual audited financial statements or subject to limited review by the accredited auditor; or
- The total value of bonds mobilized in every 12 months is greater than 50% of its equity based on the latest annual audited financial statements or subject to limited review by the accredited auditor and greater than VND500 billion.
A 2-year "cooling period" from Jan 1, 2021 will be given to issuers before the requirements are compulsory.
- The MOF states that the amendment of regulations related to the bond market is necessary in promoting a credit rating custom in Vietnam. Regarding the private placement of C-bonds, more specific regulations are needed to ensure investors’ information rights.
The necessity of independent credit ratings
- The Asian Development Bank (ADB) points out that Vietnam's bond market is growing more rapidly than those of other countries in the region. Additionally, credit ratings are common practices in the regional bond markets for the enhancement of sustainability, investors' interests as well as appropriateness in businesses’ capital strategy.
- As a Global Credit Rating Agency, S&P affirms that the bond market has played an important role in financial market, so the development of independent credit rating agencies is extremely necessary for promoting the sustainable development of the bond market in particular and the capital market in general. In addition, Moody's also provides a general ranking method for State-owned enterprises (SOEs) and Government-related issuers, emphasizing the impact of government support on corporates’ credit ratings.
- As a bond investor, Eastspring Investments Fund affirms the importance of credit ratings to the fund's asset allocation as well as the use of independent ratings as benchmarks for asessing and monitoring asset quality. Credit ratings also help institutional investors with bond/debt instrument valuation when the secondary market is not really active. Additionally, the Eastspring Investments Fund also mentions that independent credit rating is also used in risk management of financial institutions under Basel II standards.
- As the biggest C-bonds consulting service provider and distributor in Vietnam, Techcom Securities emphasizes the following matters related to credit rating operations in Vietnam:
- The demand for credit ratings will rise relatively with the increase in public C-bonds offerings based on historical data from many countries in the region.
- In Vietnam, the bureaucracy of public C-bonds offerings procedures has resulted in the dominance of private placement. Meanwhile, the added value of credit rating seems unclear to issuers because independent credit rating agencies in the country have not yet had track records in the rating field.
- There is a need in both simplifying the public C-bonds offering procedure and moving towards transparency of corporate bond market via credit ratings.
Rating Methodology and Procedures
Proud to be one of the first two licensed CRAs by MOF to operate in Vietnam, FiinGroup has raised a number of issues surrounding the Vietnam’s C-bond market and affirms its willingness to support the bond market development:
- Firstly, the issuance of C-bonds in Vietnam is very active but mainly via private placements to institutional investors. Individual investors’ participation has been steadily increasing through bond funds and direct investment, so does the subsequent distribution of securities companies and commercial banks. Currently, the drafted regulations stipulate that only professional investors, including individual investors, can participate in bond investment in the form of private placement. Therefore, credit rating agencies will play as an independent and reliable information provider for both institutional and individual investors’ decision making.
- Secondly, the concern of Vietnam’s C-bond market is the mispricing of C-bonds whose values are currently incompatible with their coupon rates and the issuers’ financial health, hence, their capability to fulfill financial obligations. In fact, the issuer’s coupon levels concentrate around 10-12% p.a. while issuers’ financial health scorings have a wide range. FiinGroup has conducted scoring of 24 selected bond issuers in Residential Real Estate Sector via its Fiin Ratings’ Financial Profile Scorecard, which is self-built based on our long-developed dataset. The scoring (below) indicates that alsmost all Residential Real Estate issuers have coupon rate within 10-12% while their financial profile scorings widely range from Aa (Very Good) to Ca (Very Weak).
- Third, 26 Vietnamese companies has accessed to credit rating services offered by Global CRAs including S&P Moody's and Fitch. However, the problem that rated issuers are facing is their ratings seems hampered by the Global CRAs’ application of sovereign rating cap, which is Ba or BB- for Vietnam. As this cap means "High Risk" at global level, it creates disavantages to the competitive advatages of domestics corporates, espcially the leading ones, in accessing capital internationally as well as domesticcally. Under the circumstances, Fiin Ratings and other domestic CRAs, which create a national rating scale based on the business environment and comparative database in Vietnam, can help eliminate the problem of sovereign rating cap. This is extremely important for companies with its capital strategy focusing on domestic capital market.
For more details, please find the presentation of Fiin Ratings at the Credit Rating Seminar HERE or feel free to contact our service focal point for other speakers’ presentation decks at the Seminar.
The expansion into credit ratings is part of FiinGroup's effort to better serve investors and market participants, including issuers. With our long-built track record in business and financial data analysis and the support of international credit rating experts in FiinGroup's Fiin Ratings services, we confidently believe in our readiness to support both investors and issuers and to accompany you as a valued customer for a sustainable development and efficient operation of Vietnam's bond and capital market.
Should you have any question about this Workshop or Fiin Ratings' assistance in credit rating for bonds or bond investment, please feel free to contact Ms. Pham Hoang Anh, Fiin Ratings’ Senior Client Advisor at FiinGroup via phone number 0931.736.292 or email her at firstname.lastname@example.org
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