Bond rule tweaks loosen constraints

The new rules can hold positive value for current bonds, particularly in real estate, photo Le Toan

Decree No.08/2023/ND-CP includes many new points regarding the responsibility of bond-issuing enterprises, with one of the most significant updates allowing issuers to extend the term of bonds by up to two years. Previously, enterprises were not allowed to change the term of issued bonds.

If bondholders do not agree to this change, the enterprise “must have the responsibility to negotiate to ensure the interests of investors”, the regulations said. If the negotiation process does not reach the expected results, enterprises must fulfill their obligations to the bondholders according to the announced bond issuance plan.

“Many companies have already done this, but it’s good to have a clear industry regulation,” assessed Nguyen Quang Thuan, chairman and CEO of financial data provider FiinGroup. “Transferring bad debts to the future is a reasonable approach that banks have already taken. However, for bonds owned by individual investors, there may need to be additional guidance and supervision to avoid putting them in a worse position for an extended period of time without any benefit.”

With domestically offered bonds, if issuers cannot fully and timely pay the principal and interest in VND, they may negotiate with the bondholders to pay at maturity by assets other than cash. This solution should ensure the principle that the bondholders approve, and the business must disclose unusual information and is responsible for the legal status of the assets used for payment.

According to industry experts, the conversion of bond debt to other assets still needs a negotiation process, which is a key point in the new regulation.

“Again, some investors have already done this, but it’s good to have a clear industry regulation as a legal basis for the stronger handling of bad debts from corporate bonds,” Thuan of FiinGroup said. “The key issue is the legal status and conversion price of these assets, which will require negotiations between companies and investors.”

The newly issued decree also temporarily suspends regulations on determining the status of professional securities investors as individuals. According to the old regulations, to buy privately issued corporate bonds, individual investors needed to hold a portfolio of securities of at least VND2 billion ($85 million) for 180 days. The old regulation on bond distribution time not exceeding 30 days is also no longer in effect. This allows businesses to have more time to find investors, increasing the likelihood of success for the offering.

According to Thuan, this would be an improvement in bringing back individual investors if the issued bonds are of better quality and transparency.

“Hopefully, individual investors with small amounts of securities but plenty of savings will again participate,” he said. “However, the interest rate must be high enough to compensate for the risk, and be more attractive than the current savings rate. In the short term, this would also support individual investors who do not meet the new requirements for the current 2-year extension.”

Before Decree 08, the regulations on bond offering and trading were based on Decree No.65/2022/ND-CP issued in September 2022. That itself is an amended and supplemented version of a 2020 decree with the expectation of tightening the market after a period of rapid growth and many disturbances.

Compared to the latest regulations, Decree 65 had more constraints on investor status, issuance purpose, and principles for using bond capital. An example would be to allow enterprises to issue bonds only to carry out projects and restructure their own debts, and must clearly state this purpose to investors at the time of issuance.

“In short, these new regulations do hold positive values and are the basis for promoting measures towards a ‘soft landing’ for current bonds, especially real estate bonds,” Thuan assessed. “The new decree can help implement debt restructuring by creating specific regulations so that investors and businesses can negotiate the extension and postponement of bond debt quickly and more drastically, depending on the specific situation of each investor and each project.”

In particular, the issue of refinancing these corporate bonds is based on the legal status and feasibility of the apartment market, and new terms including interest rates that are reasonable for both parties. “As for the restoration of confidence and investment demand for bonds, it may take time and additional solutions,” he added.

The corporate bond market experienced rapid growth in 2020 and 2021, with issuance volume of nearly $20 billion and $28 billion, respectively, according to data from the Vietnam Bond Market Association. The growth driver of this fundraising channel came from both sides – the supply side recorded a sharp increase in capital demand of real estate businesses and banks, while the demand side purchased bonds to enjoy higher interest rates than investors’ savings.

However, the issuance volume in 2022 was only $11 billion and, in January this year, the market only had one successful issuance.

Meanwhile, bond maturity pressure is increasing, as businesses face liquidity problems and cannot issue new bonds to restructure debt. VNDirect estimates the maturity value of corporate bonds this year is almost $12 billion, focusing heavily on the second and third quarters. A number of businesses, especially real estate groups, have reported violations of their obligations to pay principal and interest, with many individual investors looking to sell bonds at a 14-17 per cent discount to get their money back.

“In fact, of 62 lots of bonds with late payment of interest and principal, about 70 per cent are real estate bonds. This is the segment that the market is very much interested in, because the quality of these bonds is mostly low, along with many difficulties the industry is facing right now,” Thuan of FiinGroup said.

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Clear bond regulations can be stepping stone for industry The new Decree No.08/2023/ND-CP will lay a concrete foundation in Vietnam for the legal corridor to put constraints on the corporate bond market. To start with, it establishes a legal framework for issuers to consent to the modification of certain provisions of the bond, particularly maturity date extensions.