Privately Issued Corporate Bond Markets – Rescue?

Mr. Nguyen Tuan Minh
March 7, 2023

#Vietnamlaw #CorporateBond, #Bondmarkets #BondPrivatePlacement #FinancialMarkets

After a series of scandals, scandals, and criminal proceedings relating to some well-known privately issued corporate bond issuers and related corporate officers, the Government issued Decree 65/2022 amending Decree No.153/2020 on private placement corporate bonds, effective on September 16, 2022, which introduced stricter regulations on procedures and conditions for such bond issuance, and tightened the conditions of qualified individual bond investors who can buy such bonds making a big disruption to bonds markets. Vietnam’s corporate bond markets fell freely and there were almost no new issuance since. Not only the primary market was disrupted, the secondary market where individual investors actively traded was also suddenly interrupted because a larger part of qualified individual investors just became non-qualified. At the same time, the macro economy faced difficulties one after the others. SBV imposed policies to tighten market liquidity, banks raced to mobilize funds pushing fast interest hikes at the same time bank funding to businesses became scarcer due to SBV granted credit growth room was tied up. As commercial banks had no room for credit underwriting throughout 2022, businesses were going down, the real estate market fell freely, the stock market was so volatilely running, the pressure of VND hundreds of trillions corporate bonds was about to mature without available repayment sources. “Rescue” has become a catchphrase not only for businesses in general, but real estate and bond investors in the relevant markets.
The issue of amending Decree 65/2022 was raised, and after nearly 6 months, it is probably because this issue is becoming more and more urgent, by a shortcut procedure, the Government issued Decree 08/2023 amending, supplementing and suspending the effect of a number of articles of Decree 65/2022 on Sunday, March 5, 2023. Decree 08/2023 took effect on the same day.
Decree 08/2023 offers 3 groups of solutions:
1. Allowing an issuer when unable to pay the principal and/or interest of the bonds in cash to negotiate with the bondholders for payment with other assets on the principle of compliance with the provisions of law and if bondholders’ agreement obtained, the Issuer must disclose information and take responsibility for the legal status of the assets used to repay the principal and interest of the bonds.
Such regulations help clearly legalize this right for businesses and it is a good thing. However, it doesn’t really make much sense. In practice, Enterprises fall into a situation where they do not have money to repay their debts but they still have other assets, they should negotiate with creditors to receive debt payments in other assets in compliance with the current civil law.
2. For those issued bonds which are still outstanding, the issuer is allowed to negotiate with the bondholders for extension of or rescheduling the bond’s term for up to 2 years if 65% of bondholders agree. However, Decree 08/2023 further stipulates that if there are bondholders who do not approve the payment extension/scheduling, the issuer then must pay these bondholders in full in accordance with the published issuance plan, interestingly as it clearly puts forth, even in the case if 65% of the bondholders have agreed.
This regulation is also boasted to legalize such a right of the issuer. However, it probably doesn’t make much sense or worse. Under the current regulations on corporate bonds, changing the term of a bond repayment is a change of the terms and conditions of the bond issuance plan and the issuer can do such change if it can call for bondholders’ meeting or make a circular request to the bondholders for approval of the change (to the terms and conditions of the bond issuance plan) and if it can get 65% or more of the bondholders approving it then the change is effective and binding on all bondholders. Further, according to such approval mechanism of the parties, the bond maturities can be deferred even to more than 2 years in accordance with the current civil law, under which there is no restriction on how long the repayment extension/rescheduling debtor(s) and the creditor(s) can agree with each other. Thus we can say it is worse for everyone because the provision of maximum 2 years debt repayment extension/scheduling under Decree 08/2023 indeed limits the civil rights of the parties.
In addition, the stipulation that bondholders who do not approve the repayment term change must be paid in full by the issuer. This means those do not agree will be paid off prior to the others who approve the rescheduling/extension. This stipulation will, in fact, make it to be pointless for a very simple reason, no bondholder would foolishly agree to an extension and let someone else be paid before him.
3. Delaying the implementation of 03 regulations of Decree 65/2022 to December 31, 2023, including regulations on determining an individual investor to be a qualified professional securities investor (the delayed regulation defines a qualified individual investor to: “maintain an investment holding in listed securities with a value of at least VND 2 billion, determined by the daily average market price for a period of at least 180 consecutive days before the date of determination of investor status (excluding the value of loans for margin trading and the value of securities to be re-purchased (or according to the market, called stock repo)).
This delay is reasonable, but the delay time is too short, so the target may not be achieved due to the number of individual investors who may meet the professional investor conditions of Decree 65/2022 from Jan. 1, 2024 may not be a lot because in the stock market conditions of 2023 when VN Index may continue to widely fluctuate and when market confidence and liquidity may not improve rapidly dủing the second half of 2023, the portfolio of list of listed securities held by an investor may lose its velue, so many investors which may be now qualified would then be unqualified.
Just fingers crossed. As the Prime Minster said somewhere recently, the laws would bring no miracle, businesses and investors should try to rescue themselved.
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