Tiếng Việt
中文 (中国)
The credit rating of bonds in Vietnam is a very important aspect that businesses, as well as investors, need to take extra care of. However, in Vietnam, the credit rating of bonds doesn’t receive as much attention as in other countries, which significantly impacts the market. So, what are the causes, and solutions of this phenomenon, and what are the regulations on the credit rating of bonds in Vietnam?
In Vietnam, bonds issued to the public are not subject to compulsory credit rating. Accordingly, investors must take the risk on their own behalf when investing in the bonds from the businesses that are not checked on the aspects that ensure their promises of high-interest rates.
Consequently, there have been countless cases in which the investors are left empty-handed because the businesses that issued those bonds end up bankrupt, can’t afford to resolve their obligations, etc.
This situation needs to be changed in order to develop the bond market in Vietnam, to be able to stand equal with other great nations in the world.
Credit rating of bonds in Vietnam
To enhance the transparency of the market and serve as a basis for investors to choose investment channels, the credit rating of bonds is the most important tool.
Basically, credit rating is understood as an assessment of “credit quality”, i.e. the ability of a business to repay its debts.
The ranking of credit rating is made based on the analysis of factors related to financial indicators, business activities, loan and repayment history, etc.
Credit rating is performed by credit rating agencies, which are specialized companies providing services to assess the financial strength of businesses, especially in regard to their ability to meet principal and interest payments.
There are two types of credit ratings: credit ratings of businesses (or issuers) and credit ratings of debt instruments such as bonds or some specific loans.
Thus, it can be understood that bond credit rating is a form of debt instrument credit rating, which is an assessment of the creditworthiness of the issuer’s solvency for bonds.
Bond credit ratings typically include an assessment of the bond’s terms, collateral, and other factors that may affect solvency (such as a third-party guarantee) in the event of a business’s insolvent feature.
Reasons why bonds needed credit rating
In Vietnam, the investors are mostly office employees who don’t have strong knowledge of the financial markets.
Instead, they use their idle cash from salary to try to make it double, or triple instead of investing in banks that have a rather low-interest rate.
Therefore, they take their eyes on stocks, bonds, gambling, etc., any methods that might give them a high-interest rate in a short time.
However, all of these types of investing comes with a high risk of losing part or the entire amount of investment.
In order to assess the credit risk or default risk, the system of credit rating has been established. However, at the moment, the organizations authorized to give a credit rating in Vietnam are still low in comparison to other countries.
For investors, the credit rating given by a reputable organization will give investors more information to assess risks, thereby making reasonable investment decisions.
For bond issuers, bonds with a high credit rating also increase the credibility of the business in the eyes of investors, making it easier for the business to raise capital.
In addition, if the Vietnamese investors changed their methods of investing, and focused more on the credibility of a bond, the business with a high credit rating will gain more attraction and will develop exponentially.
The credit rating system in Vietnam
Rating agencies in Vietnam in particular and in the world, in general, often build and use their own credit rating system with letters as the main symbol. Accordingly, the bonds will be ranked in alphabetical order A, B, and C corresponding to the level of risk from low to high.
Each rating agency has a different system of credit ratings, but in general, they classify bonds into two levels: investment grade and non-investment grade.
Bonds with an investment-grade are safe and stable bonds associated with issuers with positive business prospects. One of two licensed credit rating agencies in Vietnam, FiinRatings, rated their investment-grade bonds as follows:
- AAA: Best capacity to meet financial obligations (Extremely Strong);
- AA: High capacity to meet financial obligations (Very Strong);
- A: Good capacity to meet financial obligations but vulnerable to adverse economic conditions and changing circumstances (Strong);
- BBB: Moderate capacity to meet financial obligations but more vulnerable to adverse economic developments (Neutral).
Non-investment-grade (also known as “speculative” grade) bonds have lower, or even unrated ratings. Bonds of this grade are considered high-risk investments.
Therefore, to attract investors’ attention, they are often issued with a rather high or extremely high-interest rate. However, these types of bonds are also extremely risky and may leave investors empty-handed. According to FiinRatings’ rating system, non-investment grade bonds are typically rated as follows:
- BB: Low capacity to meet financial obligations and has a speculative element (Risky);
- B: Weak capacity to meet financial obligations. Sensitive to business, financial and economic conditions (High risk);
- C: Very Weak or a high probability of default. Very sensitive to business, financial and economic conditions (Extremely high risk).
The bond market in Vietnam
The development of the corporate bond market has created a strong channel to raise capital for businesses.
However, there are also problems with the bond market in Vietnam as we have witnessed in the past few months, in reference to the Tan Hoang Minh case.
In order to strengthen the bond market, the Ministry of Finance has issued many recommendations on the corporate bond market and the advice also includes investors who are inexperienced in the bond market.
Specifically, when investing in corporate bonds, investors need to be cautious, assess the financial situation of businesses, and assess bond risks before making investment decisions, not just looking at high or low-interest rates.
Even if the investor can read the financial report, it’s safe to say that they haven’t fully understood the credibility of a business like the credit rating agencies.
Accordingly, investors should consult about the credit rating of a bond before making an investment and if the bond has no credit rating, they shouldn’t risk it all on the promise of a high-interest rate. Because if the business or project encounters difficulties, the investors might lose it all.
Credit rating in Vietnam
To develop the corporate bond market, credit rating activities play an important role. Credit rating agencies contribute to increasing operational efficiency in terms of investment supply and demand in the market, helping investors to better perceive the financial capacity and debt solvency of the enterprise, as well as related risks to have investment orientation.
The assessment of credibility in Vietnam, frankly, is still very limited because there is no regulation on the mandatory use of credit rating services when issuing bonds to the market.
This means that when an enterprise issues a bond, there is basically no third-party’s oversight into what that bond is and what is the risk when buying that bond.
Nonetheless, that is perhaps what the investors in Vietnam want. Because if there is a credit rating, the interest rate of that bond will surely be lower and the investors won’t have as many profits as when there are no ratings.
High risk means high rewards.
However, on all the investors on bond, perhaps there are only some actual winners.
Although the risk can’t be entirely cut as credit ratings is only a method to assess the winning probability of the investors. There is no 100% guarantee when investing, even if it’s an investment in the national bank.
However, we can raise the winning chance for everybody if we have some strong regulations on credit ratings on bonds.
Therefore, in order to promote the role and activities of credit rating agencies in the coming time, the Ministry of Finance has reported to the Government to submit to the National Assembly for regulations on credit rating for corporate bonds issued to the public.
The Decree guiding the Securities Law is being submitted to the Government for promulgation in the direction of stipulating credit rating cases and implementation roadmap.
This is to gradually form a credit rating culture for both privately issued bonds and bonds issued to the public as well as to increase the openness and transparency of the corporate bond market.
ASL LAW is the top-tier Vietnam law firm for Investment Services. If you need any advice, please contact us for further information or collaboration.
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