Unusual Q1 upsurge in corporate bond issuance

Bond issues in the first quarter are usually low as it is a period where enterprises are just drawing up their annual plans, taking a long Lunar New Year break and so on, brokerage firm Saigon Securities Inc. (SSI) noted in its latest report.

What is also surprising is that the surge happened at the time of the Covid-19 pandemic, which has heavily affected many businesses. But this did not seem to stop corporates from issuing more bonds in the first quarter, with a total value of VND47.5 trillion ($2.02 billion), the SSI report said.

Of these, real estate firms accounted for VND23.2 trillion ($988.49 million), or 49 percent of all corporate bonds issued, an increase of 9.8 percent year-on-year. The banking sector issued bonds worth VND940 billion ($40.05 million), or 2.3 percent of the total.

The first quarter bonds were issued for an average annual yield of 10.4 percent, an increase of 1.08 percentage points over the Q4 2019 average, and 1.57 percentage points higher than the 2019 average.

SSI said the higher risks businesses have to face a result of the Covid-19 pandemic has resulted in investors asking for higher interest rates; while the banking sector, which usually issues bonds at lower yields, made up a large proportion of bond issues in 2019 but only a minute proportion in Q1, SSI said.

Last year, both state-owned and private banks had rushed to issue bonds to restructure their capital so that they can comply with Basel II international regulations on credit safety limits, and to satisfy credit growth, which was rising faster than growth of bank deposits.  

In Q1 2020, banks issued bonds at an average interest rate of 9.26 percent in the first quarter, a sharp increase of 2 percentage points over last year’s average, a natural result of them being issued for longer maturity periods, SSI said.

Real estate firms issued theirs at average interest rates of 10.77 percent per year, up 0.43 percentage points over last year’s average, and other financial institutions averaged 10 percent yearly, up 0.32 percentage points over 2019, despite their maturity periods being 1 or 2 months lower than last year’s bonds, SSI said.

In the first quarter, individual investors bought up 20 percent of total issued bond value, compared to 10 percent in 2019. Real estate bonds accounted for 28.3 percent of bonds issued in the first quarter, the report said.

It forecasts that bond demand will decline in the second quarter, as a result of Covid-19 forcing businesses to cut down on production plans, but recover in the third quarter when the epidemic is under control.

The banking sector is not expected to issue as many bonds as last year, and will mostly focus on bonds of 7 to 10 year maturity periods, while corporates in other fields like real estate, a sector to which lending is restricted by the State Bank of Vietnam, will still want to issue high amounts of bonds.