Clearing up the liquidity issue through amendments

Many bond issuers begged regulatory authorities to assist them. In response, the government issued Decree No.08/2023/ND-CP on private corporate bonds on March 5 to alleviate the pressure on bond issuers this year.

Bui Thi Thu Nga Banking and finance, Account manager BowerGroupAsia Vietnam

Decree 08 postpones a number of new standards until January 2024, giving the market time to adjust and opening space for bondholders and bond issuers to negotiate. It amends Decree No.153/2020/ND-CP from December 2020, and Decree No.65/2022/ND-CP from September last year. After assessing the former and the case of Tan Hoang Minh, the government endorsed the latter to impose stricter management mechanisms on the trading of private bonds.

Decree 65 set higher qualifications for individual investors, compulsory credit ratings in some circumstances, a shorter period for distributing bonds, and prohibitions extending the term of bonds issued before September 15, 2022. Most of the provisions were effective upon the decree’s endorsement, while the mandatory credit ratings did not come into force until January.

However, given raising interest rates worldwide as central banks trying to combat inflation, investors in Vietnam seem to be moving away from bonds and stocks and instead are depositing their money into banks.

Enterprises have struggled to find alternative funds, including bank loans, due to high interest rates and diminished credibility. Decree 08 provides a pause for both bond market participants and authorities to adapt to a more standard and transparent bond market and overcome a complex domestic and international economic stage.

The new decree suspends, until January 1, 2024, the enforcement of regulations determining professional individual investors; the shorter period to distribute bonds; and the mandatory credit rating in specific circumstances.

The Ministry of Finance (MoF) proposed these requirements in September 2022 to help build a well-organised and transparent bond market, but the market and the regulatory agencies needed more time to adapt.

Regarding preparations for mandatory credit ratings, the credit rating market remains under serviced with only two credit ratings services providers. Fiin Ratings provides research on the development of the bond market and raises awareness via the media, while Saigon Ratings operates more quietly.

Since the issuance of Decree 65, the MoF has not granted a licence for any other firms to provide credit rating service, which could create a monopoly in the credit rating industry in the short term. A grace period of one year is an opportunity for the MoF to review and foster this service to better satisfy demand once the requirement comes into effect.

As for postponing the other requirements, the longer timeframe allows the bond market to increase liquidity. Growing deposit interest rates have driven investors away from this capital instrument and higher standards for investors could again shrink the market and create extra difficulties for issuers. Shortening the period for distributing bonds could cause the same effects by eliminating opportunities for bonds to sell out.

Furthermore, Decree 08 opens the window for bond issuers to negotiate with bondholders if they fail to repay as scheduled via two core allowances.

Instead of paying in money, issuers can repay the principal, interest and other obligations with non-monetary assets, as per negotiation with bondholders. This paves the way for bond issuers and holders to find the best solutions to preserve their own assets and reputation, which could work better when bondholders are individuals.

Bond issuers may extend the final maturity date of bonds issued before September 15, 2022, by no more than two years, as well as other terms and conditions, given they obtain their debtors’ approval. This adjustment favours bondholders that are commercial banks, since they would not need to deal with the raising non-performing loan ratio caused by bond issuers’ default.

When negotiating changes, the bond issuer(s) must receive approval for the change from bondholders representing at least 65 per cent of total outstanding bonds. Individual bondholders are protected, however. If a bondholder rejects altering the terms of a bond, then the issuer must fulfill their obligations to that bondholder as scheduled.

In general, the issuance and immediate enforcement of Decree 08 is positive for the bond market. It provides a grace period for firms and authorities to adapt and prepare for a standard private bond market, and it opens a dialogue for issuers to find alternative ways to fulfill their obligations, thus securing the rights and interests of both sides.

Nonetheless, all parties must take this opportunity prudentially as another extension beyond December 31 would signal agencies’ compromising in standardising the markets, thus discouraging firms to adapt to the proposed regulations and affecting the bond market in the long term.

Restoring confidence at centre of bond provisions The newly introduced alternatives to a corporate bond decree are envisaged to lay a foundation for issuers to address their difficulties, relieve liquidity strains, and gradually restore investor confidence.

Building a reliable corporate bond market Many businesses will see their bonds mature in 2023, with about $6.5-8.7 billion being due.

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.

Bond rule tweaks loosen constraints To address issues of transparency and investor protection, the government has issued a new decree that introduces several key changes to the regulatory framework for corporate bonds in Vietnam.