Investors will respond cautiously to the new issuance of government-backed securities as Vietnam continues to be vexed by transparency and heavy bad debt problems.
The Vietnam Bank for Social Policies (VBSP), a state-owned organisation that provides funding to poor households, failed to raise its targeted amount of VND1 trillion (US$47.7 million) worth of government-backed bonds in an auction that took place on February 27 and managed to only sell one-fifth of its total.
The total was distributed equally between three- and five-year tenors, but the former tranche only managed to sell VND200 million from the VND1.51 trillion registered at a yield of 9.79% per annum while the latter tranche failed to raise any funds on higher yield expectations, note experts.
“Investors prefer to invest money in risk-free bonds – like state bonds instead – and they are currently pricing VBSP bonds slightly higher than what they are willing to pay given the additional risk that they have to bear,” said Trinh Quang Dung, analyst at Vietcombank Securities to Asiamoney PLUS in a telephone interview on March 4. “At the current moment, the reputation of VBSP is not very good and depends on its ability to pay back all the debt.”
Last July the State Audit of Vietnam (SAV) reported that VBSP had lent to non-creditworthy entrusted social organisations and did not have the proper monitoring mechanism in place to detect such errors.
The three bidders for VND660 billion five-year paper were asking for yields of between 10.4%-11.7% per annum. This is approximately 650 basis points (bp) to 1,950bp above government debt of a similar tenor, highlight experts.
“In Vietnam, it is true that VBSP and VDB [Vietnam Development Bank] have encountered problems in their issuance lately and the market requires large premiums over state treasuries despite the guarantee,” said Dan Svensson, fixed income analyst at Dragon Capital to Asiamoney PLUS. “A strong reason is that the Treasury bonds have far better liquidity than VBSP and VDB’s [debt]. In addition even if a guarantee is honoured it may take time to enforce it which means that the investor may lose money.”
Just like VBSP’s case, other organisations – which have social responsibilities to meet – have been raising additional financing via government-backed securities route. However, one known scandal continues to taint the reputation of these securities and is another reason why VBSP failed to gather investor interest in its recent issuance.
In October 2012, giant state highway builder Vietnam Expressway Corporation (VEC) faced incurring default in the repayment of some of its mature project bond yields following a move by the Ministry of Finance’s (MoF) the month before.
The MoF enacted Document 12761/BTC-QLN requiring VEC to self-arrange capital sources for payment of mature bond yields to Japan-based Dai-i-chi, a life insurance company.
The decree stipulates that in order to get the guarantee from the government, the bond issuers must make profits in the last fiscal year. However, this proves to be difficult for VEC, which is still in the very early stage of investment.
“VEC is refusing to pay the principle at the due date,” said Dung. “This created the bad reputation for government-backed bonds and that’s why investors are refusing to invest in this paper at the moment.”
A Vietnam-based head of global markets agrees: “In terms of the appetite for government guaranteed bonds, it has become much less compared to previously when people assumed that government bonds and government-guaranteed bonds are perceived to be similar. With the most recent VEC bond scandal, people are now really looking at the cash flow of the banks carefully before they decide whether to buy.”
By mid-October 2012, VEC owed a total VND516.1 billion to creditors, including VND100 billion principle and VND416 billion mature bond yields of a lending package worth VND4.4 trillion with MoF acting as underwriter to raise investment capital for carrying out Cau Gie-Ninh Binh and Noi Bai-Lao Cai highway projects.
Experts believe that the government needs to put proper protocols in place to boost balance sheet transparency of these organisations as well as establish clear and concise procedures to handle a possible default scenario.
“These banks need to write-off bad debt and make their balance sheets clearer to investors. This will however take time,” said Dung. “They have to disclose their bad-debt ratios, bad-debt provision and once they disclose the solid input and output of the money, things are going to get better.”
“The government will come in if they cannot pay back the bonds in three to five years. The question mark remains how long the process will take, that’s why investors are quite reluctant to invest in this type of debt,” said the head of global markets for Vietnam.
The Vietnamese government has urged VBSP to make plans to ensure annual capital for these preferential loans, which is expected to take effect from April 16 this year.
As a result, the appeal for government-backed debt is likely to remain in the shorter tenors of less than five years as investors remain cautious, note fixed income experts.
Vietnam's sovereign credit rating was cut by one notch to ‘B2’ – its all-time low for the country – by Moody’s last September.