Lessons Learnt from our First Rating Assignments

Vietnam Corporate Bond Market remains as one of the most interesting investment channels during 2020 and the first quarter of 2021. Despite the slowdown in the fourth quarter of 2020 after the effective date of Decree 81/2020/ND-CP, Corporate Bond issuance has been still active in general with a new issuance value of VND429.5 trillion in 2020, increased by 28.3% compared to 2019.

 

Vietnam Corporate Bond Market remains as one of the most interesting investment channels during 2020 and the first quarter of 2021. Despite the slowdown in the fourth quarter of 2020 after the effective date of Decree 81/2020/ND-CP, Corporate Bond issuance has been still active in general with a new issuance value of VND429.5 trillion in 2020, increased by 28.3% compared to 2019.

As part of implementing these new regulations and market education for the credit rating services in Vietnam, the Ministry of Finance of Vietnam (MOF) with support from Asia Development Bank, held the Seminar on Developing Credit Rating Service for Vietnam at the Ho Chi Minh Stock Exchange Tower in HCMC on 16 November 2020.

As a credit rating agency licensed by Ministry of Finance of Vietnam and will release the first rating results soon, FiinGroup was invited to present about methodology and our lessons learned from the First Rating Assignments.

Here are the key takeaways from the seminar:

New regulations on credit rating for coporate bonds (C-bonds) issuance:

Decree No. 153/2020/ND-CP issued on December 31, 2020, by the Government stipulates the cases that an enterprise must have a credit rating before issuing public bonds:

a) The total value of bonds mobilized in each 12 months is greater than VND 500 billion and greater than 50% of equity based on the latest annual audited financial statements or subject to limited review by the accredited auditor and greater than VND500 billion; or

b) The total value at par of outstanding bonds by the time of offering is greater than 100% of its equity based on the latest annual audited financial statements or subject to limited review by the accredited auditor.

A 2-year "cooling period" from Jan 1st, 2021 will be given to issuers before the requirements are compulsory.

The necessity of independent credit ratings

• The Asian Development Bank (ADB) pointed out that Vietnam's bond market is growing significantly rapidly than those of other countries in the region. In the period from 2017 to 2020, corporate bond growth reached its highest level ever, about 70%, and mainly focused on maturities of less than 10 years. In order to support the market sustainable improvement, contribute to protecting the investors' rights as well as help businesses to have an appropriate capital strategy, the development of credit rating services is one of the indispensable factors. This is also a common practice in other bond markets in the same region.
• As a Global Credit Rating Agency, S&P affirmed that the bond market has played an important role in the financial market, so the development of independent credit rating agencies is extremely necessary for promoting the sustainable development of the bond market in particular and the capital market in general. At the seminar, S&P provided information that investors are gradually paying more attention to sustainable development investment industries such as Green Bonds, Social Bonds, and Sustainable Bonds, following the global ESG standard. This is a very good opportunity for developing green finance in Vietnam, not only mobilizing domestic capital but also in the international arena. Additionally, S&P shared their methodology for ranking non-financial companies and analyzed how to conduct rating results for a specific example of VinGroup. Since there, the participants can have a more specific view of the credit rating process according to international standards.
• Australian Securities & Investments Commission (ASIC), as a regulator, shared the conditions for licensing 6 agencies in Australia providing credit rating service and the necessity of monitoring their independent activities. In Vietnam, the Ministry of Finance has issued documents allowing a maximum of 5 agencies to be licensed to operate credit rating services by 2023. This regulation simultaneously supports the demand for having domestic credit rating and strictly controls the operation of these agencies.

Lessons Learnt from our First Rating Assignments

Since being officially licensed to operate the Credit Rating Service from March 20th, 2020, FiinRatings has rated 03 issuers in different industries. We are happy to share FiinRatings' experiences, thereby giving issuers and investors a holistic view of the credit rating process and national methodology.

Ms. Tam Tran, Rating Analyst of FiinRatings, shared at the seminar a specific example of FiinRatings' credit rating for a non-financial enterprise, as follows:

At the seminar, Ms. Tam Tran also raised the issues that a lot of issuers and investors may misunderstand about credit rating services, below are some main contents:

#1: Credit Rating vs. Auditing

Our scope of work often be understood as the audit of the financial statements by many corporate

In fact, there are Some fundamental differences between the two services. Firstly, while audit is an opinion on the business complying with accounting standards in recording financial entries of the past fiscal year, credit rating gives opinion on the overall creditworthiness of the business and do projections to estimate their ability to meet debt obligations in the future. Second, audit is done periodically (such as semi-annually or annually) while credit rating is automatically updated whenever there is a risk event that may affect the result. The third distinct factor that can be undeniable is that the credit rating provides relative ranking between enterprises in the same industry which audit doesn’t have the same function.

#2: Credit Rating vs. Equity Research

Having Credit Ratings is good for Stock Price?

There are many opinions that assume that credit rating opinion is similar to stock analysis, which can make recommendations to buy/sell, estimate expected returns, and can be used as a factor for making an investment decision. Credit rating is not, in fact, a measure of the valuation of a business or stock and does not provide any recommendation to buy/sell stocks. Credit rating, by assessing the overall creditworthiness for the business and forecasting the ability to afford their principal and interest in the future can help investors have another perspective from an independent side before giving their own investment decision.

A prime example of this idea is in case a business issues Additional Shares. From investors holding corporate shares perspective, this may be a negative signal as their earnings per share decreased due to the dilution risk. However, from credit rating perspective, this can be a good signal when assessing the ability of the enterprise to mobilize and expand their capital sources, supporting their ability to meet the debt obligations company in the future also.

So that, what should issuers do for having an efficient rating action? Below are some key recommended factors:

• Regular Business Performance Tracking and Planning
• Active Management Engagement
• Transparency

For more details, please find the presentation of FiinRatings at the Credit Rating Seminar HERE, or feel free to contact our service focal point for other speakers’ presentation decks at the Seminar.

The expansion into credit ratings is part of FiinGroup's effort to better serve investors and market participants, including issuers. With our long-built track record in business and financial data analysis and the support of international credit rating experts in FiinGroup's FiinRatings services, we confidently believe in our readiness to support both investors and issuers and to accompany you as a valued customer for sustainable development and efficient operation of Vietnam's bond and capital market.

Should you have any questions about this Workshop or FiinRating's assistance in credit rating for bonds or bond investment, please feel free to contact us via fiinratings@fiingroup.vn.

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