The restrictions on real estate bonds remain in place, putting pressure on bad debts.

A company's cash flow should be considered more than its financial leverage ratio.

Recently, the State Bank of Vietnam has been seeking feedback on a draft Circular amending and supplementing some articles and suspending the effect of some articles in Circular 16/2021 on credit institutions buying and selling corporate bonds.

Commenting on this draft, economist Nguyen Tri Hieu affirmed: "I support the State Bank of Vietnam allowing banks to repurchase corporate bonds that are not listed or not registered for trading on the UpCOM exchange."

Economist Nguyen Tri Hieu.

However, implementing this also involves certain conditions. Accordingly, when a business has outstanding debt to a bank, the outstanding debt cannot exceed 15% of its equity, the bank is not allowed to use bond purchases to refinance debt, and such purchases must be included in the business's overall debt balance in accordance with the Law on Credit Institutions.

According to Mr. Nguyen Quang Thuan, Chairman of FiinRatings, a unit specializing in credit ratings, the most significant issue addressed in the draft is the context of recent pressure to buy back bonds as investors demanded early settlement.

"The banks' repurchase of corporate bonds aims to alleviate the pressure that some credit institutions are facing because they previously distributed them to investors while the issuers were experiencing cash flow difficulties and were unable to repurchase them," he said.

Banks need to assess the bond-issuing company's ability to repay the debt and review the credit rating of an independent entity.

The draft also adds a provision that banks can only purchase corporate bonds when the debt-to-equity ratio (including the volume of corporate bonds expected to be issued) does not exceed 5 times based on the most recent audited financial statements.

However, according to Mr. Nguyen Tri Hieu, the leverage ratio is only a ratio on the balance sheet; what is important is whether the company's cash flow is sufficient to repay the debt. Banks need to assess the bond-issuing company's ability to repay the debt and consider the credit ratings of independent credit rating agencies, as these ratings are more comprehensive, detailed, and objective than the bank's internal assessment.

The draft also amends the requirement for credit institutions to use cashless payment services in bond purchase transactions with bond sellers. Mr. Hieu believes this is reasonable, as it will help control business transactions and prevent the illegal use of capital…

To determine the feasibility of a plan and the financial capacity of a bond-issuing enterprise to ensure timely repayment of principal and interest, Mr. Hieu proposed that the three most important criteria are cash flow, profitability, and liquidity.

First, the company's cash flow needs to be sufficient to cover its debt. Therefore, the debt coverage ratio (Net income/Total principal and interest) must be at least 1.

Regarding liquidity, it is necessary to assess it based on the short-term debt solvency ratio (Current assets/Current liabilities) or liquidity ratios that measure the company's ability to meet its debt obligations and its margin of safety…

Risk of impact on bank bad debts

Overall, Mr. Dang Tran Phuc, Chairman of the Board of Directors of AZfin Vietnam JSC, commented that this draft will somewhat alleviate difficulties for businesses with issued bonds subject to the regulations of the State Bank of Vietnam, thereby reducing stress and pressure on bond-issuing businesses in particular and the entire financial market in general.

"Although the impact on the bond market is not significant, overall, this is a positive signal, 'unleashing' the State Bank of Vietnam to allow banks to participate more deeply in the bond market, thereby promoting better development of the bond market along with other measures," he said.

Commenting on the impact on the real estate market, Mr. Phuc said that this draft also contributes to promoting a better market. This is because real estate businesses typically account for about 20% of bond issuance in the Vietnamese market, but currently, this is the sector facing the most difficulties.

"But this draft will facilitate real estate businesses in raising capital more easily through bond issuance, enabling them to raise funds by issuing bonds to commercial banks," said the chairman of the securities investment consulting firm.

Chairman of FiinRatings, Nguyen Quang Thuan.

According to the Chairman of FiinRating, if the draft amendment to Circular 16 remains unchanged, it will not have much impact on resolving the issue of corporate bonds in particular, including real estate credit.

Because when a business is late in paying its bonds, it is then likely to be late in paying its bank loans. If the overdue amount is 91 days, it falls into Group 3 - Substandard Debt, requiring a 20% provision; if it is overdue for more than 181 days, it falls into Group 4 - Doubtful Debt, requiring a 50% provision; and in the worst case, if the delay exceeds one year, it jumps to Group 5 - Debt with a high probability of loss, requiring a 100% provision for bad debt.

Mr. Thuan assessed that pressure on bad debts will arise in the near future if they are not restructured. Therefore, the cross-impact on the credit quality of banks is imminent.

"This is an issue that should be specifically assessed, and subsequent policies should be implemented to address the current corporate bond problem and minimize the risk of non-performing bank loans," this expert commented .

Source: https://www.nguoiduatin.vn/sua-doi-tt16-chua-coi-troi-cho-trai-phieu-bds-ap-luc-len-no-xau-a600209.html