Crucial legislative developments in the bond market

By Phan Anh Vu - Partner, Indochine Counsel

Many companies have directed their attention to bonds as a substitute channel to raise capital for long-term business plans. The procedure for issuing corporate bonds is much less complicated than satisfying conditions and procedures to obtain loans from commercial banks.

The latest report from the Vietnam Bond Market Association shows that in the first nine months of 2021, the total value of domestically placed corporate bonds reached $16.7 billion. However, this overheating of the corporate bond market in a short time period comes with many risks, as some Vietnamese bond issuers are not sufficiently creditworthy and the market is flooded with three No’s in bonds: no credit rating, no collateral, and no repayment guarantee.

In order to preserve development of Vietnam’s bond market at a safe and sustainable rate, governmental authorities have issued specific regulations on bond issuance activities and have opened up opportunities for development of this financial market.

To ensure the operation of the banking system remains immune from recent waves of bond issuance, the SBV issued Circular No.16/2021/TT-NHNN in November 2021 on trading of corporate bonds of credit institutions. Therein, the SBV has set requirements and restrictions on the purchase, sale and management of corporate bonds of credit institutions, and most notably, enumerated cases where credit institutions are not allowed to buy corporate bonds from enterprises that issue bonds with the purpose of restructuring their debts; issue them with the purpose of making capital contribution or acquisition of shares of other enterprises; and issue with the purpose of increasing their working capital.

With a lurking risk of bad debt, the ability of businesses to repay credit loans is significantly impaired due to COVID-19, Circular 16 also restricts credit institutions with non-performing loan ratios, according to the most recent classification period of the SBV, from 3 per cent or more from participating in buying corporate bonds.

The Ministry of Finance released a draft circular elaborating on Decree No.153/2020/ND-CP in December 2020 on trading of privately-placed corporate bonds (PPCBs) in the domestic market. Although regulations on listing and trading of bonds were already introduced to the securities legal system, the lack of elaborating on regulations and mechanisms makes PPCBs practically impossible to list and trade officially on exchanges in the same manner as publicly offered bonds.

Decree No.63/2018/ND-CP released in 2018 only stipulates that PPCBs shall be deposited at and traded via the Vietnam Securities Depository and Clearing Corporation, while being subject to a lock-up period for any transfer of the bonds.

Of the $16.7 billion in corporate bonds issued in the first nine months of 2021, PPCBs totalled approximately 97 per cent. While this is a remarkable development in the Vietnamese corporate bond market, in terms of scale to GDP, Vietnam’s corporate bond market is still relatively much smaller than that of other countries in the Southeast Asian regions.

As such, this draft circular is expected to provide a transparent mechanism for PPCBs to be officially listed and traded on the Hanoi Stock Exchange. However, quite a few conditions and standards for investors and PPCBs to qualify for participation in trading are set forth. Only professional securities investors are permitted to participate in the trading of PPCBs.

Conditions for PPCBs to be put into trading include being subject to conditions and process of offering for sale as prescribed in Decree 153; and being a non-convertible bond, without warrants. Other conditions include being issued by an enterprise that has, according to the most recent year’s audited financial statements: contributed charter capital at the time its bond is put into trading is at least $1.3 million; and profitable business activities, without accumulated losses, for the year immediately preceding the year its bond is traded.

In the case of PPCBs being issued by a non-public company such bonds must be collateralised, or guaranteed to pay all principal and interest upon maturity.