Corporate bonds now the choice of businesses, again

[phuocpham]

After a period of lying idle in the crisis, businesses now are beginning to call for capital by issuing corporate bonds. The past few months have witnessed a lot of successful bond issuances.

“Why do businesses only think of contacting commercial banks when they need capital,” Dr Le Tham Duong, Head of the Business Administration Faculty of the HCM City Banking University, questioned.

“Commercial banks are not the only source of capital. Why don’t businesses think of seeking capital on the stock market or issuing corporate bonds?” he added.

In fact, Vietnamese businesses began issuing corporate bonds a few years ago. However, bond issuance campaigns were all cancelled because the global financial crisis made it impossible to raise funds from investors. Moreover, businesses had every reason to be reluctant to issue bonds with interest rates escalating in accordance with high inflation rates.

However, as the situation is now different, businesses have again thought of seeking capital by issuing bonds.

On September 1, 2009, Kinh Bac Urban Development Corporation (KBC) announced success from the third issuance of bonds, worth 200 billion dong. The corporation was also successful in the previous issuance, during which 300 billion dong worth of bonds was sold.

In Dong Nai province, Tin Nghia Company has also successfully issued 500 billion dong worth of bonds, which has prompted the company to plan for the issuance of another 300 billion dong in the time to come.

One month ago, Nhon Trach Investment Joint Stock Company successfully raised 1 trillion dong worth of capital from the public by issuing corporate bonds for the East Saigon project. Most recently, the Vietnam Steel Corporation also successfully issued 1 trillion dong worth of VND bonds.

Analysts said the corporations made a wise move by calling for capital by issuing bonds. They would have found it hard to get such huge sums of capital from commercial banks, especially at the current ‘sensitive’ moment when banks are tightening credit and keeping cautious in disbursement.

Owning KBC, a blue-chip on the Hanoi Stock Exchange, Kinh Bac Corporation could easily borrow money from banks or issue additional shares to get capital on the stock market. However, the corporation decided to issue bonds.

Analysts said that Kinh Bac did not want to issue more shares to seek capital on the stock market because it feared that the issuance could lead to so-called ‘share dilution’, which could have badly affected KBC’s price.

“A reasonable ratio of stockholder equity to borrowings will help businesses make the most of the advantages of borrowed capital, while avoiding share dilution, thus helping reduce the cost of capital,” said Mac Quang Huy, a senior executive of Nomura Australia investment bank.

Returning to the cases of Kinh Bac and Nhon Trach, borrowing money from banks would not be the best choice for real estate developers.

If borrowing money from banks, they would not be able to enjoy the four percent interest rate subsidy under the Government initiated demand stimulus programme, since the real estate sector is not the priority subject of the programme. This means that they would have to pay the commercial interest rates for loans. Analysts said that the 12.5 percent interest rate of the five-year bonds is nearly the same or even lower than the bank interest rate.

Regarding the bond interest rates, Huy said that the rate of 12.5 percent per annum on average offered by businesses recently truly reflects supply-demand on the market and is a reasonable interest rate in the current conditions. “I think that the interest rates will be stabilised at the same levels in the fourth quarter of 2009,” Huy said.

He added that the Government bond issuance campaigns recently, in which the Ministry of Finance set the ceiling interest rate at 9 percent per annum for three-year bonds, all failed because the low interest rate could not satisfy investors’ expectations.