Relations between commercial banks, real estate

Saigon Investment held a discussion with Mr. Tran Thanh Hai, Rector of Vien Dong College, on how to handle the relationship between commercial banks and real estate companies. 

Journalist: Sir, what does it mean when we say it is necessary to untangle the overlap between corporate bonds issued by real estate companies that commercial banks are currently holding?

Mr. Tran Thanh Hai: It is true that when businesses issue bonds, the number of investors is also limited, and most commercial banks underwrite this issue. But then the bank buys that bond, or the company brings that bond to the bank for a mortgage it is a different story. When considering Decree 08, the first handling of corporate bonds in general and bonds of real estate enterprises, in particular, is the civil relationship between bondholders and issuers.

If the bank holds that part of the bond, then the bank is the bondholder. Decree 08 aims to support the issuer, so businesses can negotiate with bond owners to pay the bond principal and interest with other assets. The bank as a bondholder can agree to swap property, so the choice will depend on each location and each bank.

However, the problem is that a real estate project is both mortgaged by the bank and mobilized by buyers through future contracts and as collateral to issue corporate bonds. This is very complicated, so there must be a government agency involved. The issuer always values assets higher, raising the value of assets so that assets are always higher than liabilities.

But it must be understood that liabilities are real liabilities. Debts of bondholders and bank loans are real debts. Therefore, collateral must be reevaluated when the real estate market is falling, not as high as reported by enterprises, and may even slip down to debt assets or lower than liabilities. Currently, some real estate assets are still entangled in legal procedures.

Therefore, I suggest that state agencies need to have a support department in meetings between issuers and bondholders. According to the provisions of Decree 65, enterprises can only change the conditions and terms when approved by a certain number of bond owners representing 65 percent of the total number of bonds of the same type in circulation.

But in order for the two sides to agree on how to handle this, the state agency must have a clear voice on the legal status of that real estate project. The state agencies here are the natural resources and environment industry; the construction industry; and the Department of Taxation. Then, depending on the legal status of each real estate project, a reevaluation is done. This is the negotiation between the bondholder and issuer in accordance with Decree 08.

Sir, in the past, the bank sold bad debts to Vietnam Asset Management Company (VAMC) and received special bonds, then used these bonds to discount at the State Bank of Vietnam. There is an opinion that VAMC can now be used for real estate bonds. What is your opinion on this issue?

This is also a good idea. But note that VAMC for real estate also creates trouble in discounts, because how much discount is appropriate is unclear. For real estate projects from the beginning, businesses have sought to raise prices, then they borrow from banks up to 70 percent or 80 percent of the value of collateral in bonds. Now the market price has dropped, if the discount is lower than the lending rate, banks will be affected. Therefore, discounting is arduous, requiring a consulting organization such as the existing VAMC to determine the price.

Regarding the difficulty of real estate enterprises in handling real estate corporate bonds leading to the opposite effect on the debt quality of real estate enterprises in banks, I observe some real estate giants who not only have one project but many projects. Should we think of a way to combine to solve it, say for instance, an enterprise has two projects that are both borrowing more than the reevaluation level, then combine the remaining value of both unfinished projects into one project to complete, ensuring the projects are released to the market. Since then, enterprises also paid loans to banks and reduced loan interest. I think that is a relatively feasible way to ease the bottleneck in the relationship between the bank and the issuer.

Sir, what do you think about Decree 08 that has just been issued?

Here I just want to point out one problem. Decree 08 which has just been issued is a temporary suspension of the issuers' credit rating clause. In my opinion, this is not necessarily a good thing, because the issuer is involved in all matters of property and civil liability. The suspension of this credit rating will equate this bond with another, which is not good.

In order to have a healthy corporate bonds market, it is essential to evaluate the ratings of the issuers. Issuer credit rating, in addition to warning the public of the information, is also related to the benefits and efficiency of bonds issued by ratings of organizations. This should maintain and grow throughout. Of course, the rating fee is very high, but in return, businesses will exchange for low-interest rates on corporate bonds if their health is good. In the world, countries have done it, so Vietnam can do it as well.

Thank you very much.

Source: Saigon Investment