Higher interest rates make corporate bonds popular

Corporate bonds are becoming popular due to high interest rates.

According to experts here, corporate bonds, with the first year interest rate from 14 percent-16 percent per year and floating for the next years equivalent to the 12 month term dong deposit rate plus the amplitude of rates from 4 percent to 5.5 percent, have lately become very popular.

Many enterprises keen on bond issue

Although many enterprises find it attractive, only a few have been successful in issuing bonds form 2008 till early 2010. The year 2008 saw the capital market downturn with high costs of capital (mobilisation rate even rocketed to 19.56 percent per annum). The economic outlook for the following year was not brighter with lower confidence in businesses and a small amount of bond buyers. In 2010, as the economy recovery has been underway, many enterprises managed to issue bonds with a view to financing projects and increasing operating capital in the context of shortage of banks’ short- and long-term loans.

Song Da Group is the first to issue corporate bonds in dong with the total value of nearly 1.5 trillion dong (equivalent to USD 79 million).

Similarly, EVN and the Vietnam Construction Group (VCG) launched 2 billion dong corporate bond issue. Long Hau Joint Stock Company (LHG) also issued 200 billion dong of corporate shares with the face value of one billion dong for capital for the Long Hau residential area project.

Vincom joint stock company followed the trend by issuing 1 trillion dong of five-year bonds.

The successful issues of government bonds of around 60 trillion dong together with that of corporate bonds over the first six months of 2010 means that the bond market is warming up with increased confidence of investors and a wider range of investors. Businesses can now access to more sources of medium- and long-term capital with stable interest rate.

Success owing to high interest rate

The first principal factor for the successful corporate bond issues can be attributed to high interest rates. While the average mobilisation interest rate at commercial banks has dropped from 12.5 percent to 11.5 percent, much higher bond rate has been offered. The rate for the first year starts at around 14 percent-15 percent per annum and is floating for the following years, which equal 12 month term deposit rates at commercial banks plus the amplitude of 4 percent-5.5 percent per year.

Vincom has offered the highest interest rate for five –year bonds at 16 percent annually that is adjusted very six month and defined by the 12 month dong deposit rate at Vietinbank at the day of determining the bond rate plus the amplitude of 5.5 percent.

The corporate bond issues over the first six months have also owed their success to favourable conditions in the financial market such as unstable stock market, decreased bank interest rate and government bond rate, burgeoning real estate market, which then facilitates the issuance.

However, the question is whether such high bond rate will cause disorder in the market interest rate that is on downward trend according to the government’s guidelines or affect bank’s capital mobilisation. This will not possibly come into reality as corporate bonds only account for a small proportion of the total value of capital market.

The current corporate bond rate is believed to result in dramatic input costs leading to higher products’ prices. However, only a fall in banks’ interest rate would compel a decline in the bond rate.

The need for banks’ capital

In fact, only large corporations with sound financial condition and stable consumer market can issue corporate bonds. It is clearly observed from the successful corporate bond issues in the first six months that the issuing entities are largely big corporations or listed companies with real estate and export projects. Medium and small enterprises that account for 96 percent of the country’s total enterprises fail to issue bonds due to trust shortage. Bank loans therefore would be the principal source financing these businesses.

Tags: Vietnam finance, Vietnam financial, Vietnam interest rates

Posted by VBN on Jul 27 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry