Clear bond regulations can be stepping stone for industry

March 14, 2023 | 10:00
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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.

Previously, a number of issuers negotiated directly with bondholders. However, there was no specific legal basis for such circumstances, so the agreement was fraught with complications and had a low success rate.

Clear bond regulations can be stepping stone for industry
Nguyen Ba Khuong - Senior analyst Research Department VNDirect Securities

Secondly, the decree permits the issuers to pay their debt obligations and bond interests with other legally acceptable assets. This solution opens up a viable option for businesses as many businesses are experiencing difficult cash flow problems.

Whether the agreement is ultimately approved by the bondholders will depend on specific provisions, however, such as the legality and value of the assets the business proposes to pay the bondholders.

The decree will also boost the success rate of corporate bond issuance by deferring the implementation of certain provisions, such as regulations for professional investors, or by extending the distribution period.

The extension of the mandatory credit rating to the start of January 2024 will raise access to capital mobilisation through the issuance of private bonds for some businesses.

The number of businesses with late payment obligations is expanding. We estimate that the maturity value of corporate bonds in 2023 will be approximately VND252 trillion ($10.6 billion), up 64 per cent on-year, with nearly $6.7 billion maturing between Q2 and Q3. In addition, 43 per cent of the entire maturity value of individual bonds in 2023 is accounted for by real estate businesses.

Due to cash flow shortage and restricted financial resources, a growing number of companies in this country are falling behind on their loan payment obligations as the real estate market is stagnant. According to the Hanoi Stock Exchange, as of March 5, there were approximately 45 businesses on the list of late payment obligations for interest or principal on corporate bonds.

The outstanding debt of corporate bonds of these companies is estimated to be around $5.1 billion, or nearly 12 per cent of the total outstanding debt of corporate bonds in the whole market. In 2023, the market will see the maturity of about $1.6 billion in corporate bonds issued by traded firms, representing about 15 per cent of the overall maturity value of the market.

However, we believe that other synchronous solutions will be required for the corporate bond market to recover.

The first step in restoring investors’ confidence on this issue in corporate bonds is businesses adopting more drastic measures. Real estate enterprises must also make concrete efforts to restructure their business strategies, as well as renovate their products and services to fulfill the genuine requirements of clients, as well as take steps to manage inventory to collect sufficient funds in order to resolve current property management issues.

Secondly, the management authorities in Vietnam need to devise a plan to speed up the settlement of legal procedures for real estate projects.

Similar to the lessons learned from dealing with the corporate bond crisis in regional countries such as South Korea and China, local authorities also need to assist businesses in gaining access to capital, particularly financial resources from banks. Short-term liquidity concerns are crucial. We believe the market is therefore awaiting additional positive signals from these solutions.

On the other hand, we believe that corporate bond expiration pressure is being eased, but will be a problem in Q2 and Q3. In 2023, we anticipate the maturity of corporate bonds to be approximately $10.6 billion, equivalent to an increase of 64 per cent on-year. There will be approximately 41 per cent on-year of corporate bonds maturing in Q1.

However, the maturity pressure will increase significantly in this year’s Q2 and Q3, with respective values of approximately $3.2 billion, an increase of 120 per cent on-year and $3.4 billion (up 39 per cent on-year). After this difficult period, the amount of corporate bonds maturing in Q4 2023 will decrease to $2.5 billion, a 14 per cent increase on-year.

Our statistics only include corporate bond issuances from 2019 to the present day, and exclude corporate bonds that are redeemed before maturity from 2021.

By sector, real estate group accounted for 43 per cent of the total maturity value of individual bonds in 2023, or $4.5 billion, an increase of 76.2 per cent on-year. Finance and banking followed with 31 per cent of the maturity value, equivalent to $4.2 billion, a rise of 24 per cent on-year. Other industries account for approximately 26 per cent of the total value of individual corporate bonds maturing in 2023, totalling $2.8 billion, an increase of 126 per cent on-year.

In the context of a sluggish real estate market, many businesses struggle with cash flow and have limited access to capital. Consequently, the number of businesses that are delinquent in meeting their debt obligations is progressively growing.

Bond pressure retained in real estate Bond pressure retained in real estate

If a draft decree amendment on bonds is soon passed, real estate businesses will likely be given a helping hand in the form of time to restructure their cash flows.

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Government throws life jacket to bond issuers with legislation improvements Government throws life jacket to bond issuers with legislation improvements

In the midst of stagnation in the bond market, the government’s issuance of a decree that adjusts and suspends implementation of some articles of two previous pieces of legislation on corporate bonds prioritises the restructuring of markets to ensure the lawful rights of investors.

By Nguyen Ba Khuong

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