Property firms opt for bonds as bank loans dry up

Last month, property developer Vingroup unveiled plans to sell 20 million non-convertible bonds at VND100,000 (US$4.39) each in two phases without any covered warrants or guaranteed assets.

The total value of the issuance will be VND2 trillion ($87.8 million), and, according to Vingroup, it will help partly repay its bank loans and achieve its financial targets.

Earlier, in August, Vingroup issued 84 million preference shares on a private offering basis to Hanwha Viet Nam Opportunity Private Fund 1 for over VND9.3 trillion ($400 million).

A Vingroup spokesperson said the majority of the money raised from that issuance would be used for the company’s housing and social infrastructure projects.

Also in August, a subsidiary of Vingroup, Vinhomes, issued 20 million three-year bonds worth VND2 trillion ($87 million). A month later, it issued VND5 trillion worth of two-year bonds.

Sunshine Group recently announced plans to issue 100 million three-year bonds worth VND100,000 each.

The company expects the issuance to raise VND10 trillion, which it will use for developing its business strategies and investment projects.

Why are property firms issuing bonds?

In 2019, several policies meant to restrict lending to risky sectors like real estate have or will come into force.

Among them is the State Bank of Viet Nam (SBV)’s directive to increase the risk weightage for real estate loans from the current 200 per cent to 250 per cent.

It means that for every dong of real estate loan given, the value of risk-weighted assets will increase by two and a half dong, a significant disincentive for banks to lend to the property sector since their capital requirement is a ratio of their risk-weighted assets under the Basel norms.

Besides, the central bank has already reduced the maximum amount of short-term deposits that can be used for medium- and long-term loans from the current 45 per cent to 40 per cent since January 1.

The central bank’s determination to tighten lending to risky sectors has forced property developers to look at other sources of funds.

Analysts said developers are turning increasingly to the securities and bond markets, foreign investments and mergers and acquisitions to replace bank loans.

Bonds seem to be the most preferred option, they said, explaining this is because property and infrastructure projects usually require large sums of money and bonds could help raise such large amounts.

But to raise capital by issuing bonds, firms need to have a good brand name, reputation and prestige, they said.

Besides, bond issuers are required to meet more criteria than share issuers, including transparency.

However, many companies prefer this to issuing shares and diluting their equity.

Nevertheless, taking all factors into consideration, raising capital by issuing shares or bonds is the best option for property enterprises at the moment when they have to look beyond banks for funds, they added.

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