Shaking up corporate bond issuance

Tran Thai Binh and Duong Thi Minh Han from LNT & Partners

Corporate bonds function as a loan, in which the issuing company is the borrower and investors or bond buyers are the lenders. The issuing company issues bonds and pays interest thereon on the principle similar to the loan. The issuing companies bear the payment liability to bond buyers. Corporate bonds are issued to raise funds, facilitate investment projects, manage debts, and debt payment capacity, or to monitor the effectiveness in using capital.

Laws of Vietnam allow limited liability companies (LLC) and joint-stock companies (JSC) to issue bonds in the form of private placement. While JSCs are allowed to issue either convertible or non-convertible, with or without warrant corporate bonds, LLCs are only allowed to issue non-convertible and without warrant bonds.

The Vietnamese government and ministries have made changes in regulatory structures and issued expressly sets of regulations governing the particular matter of issuing corporate bonds in the form of private placement by issuing companies in Vietnam.

For the first time, the Law on Enterprises 2020 expressly sets separate articles to regulate the offer for sale, and the transfer of corporate bonds in form or private placement, which govern LLCs in the same way they do to JSCs. Further, Decree No.81/2020/ND-CP, which took effective on September 1, has been enacted to amend some articles of the Decree No.163/2018/ND-CP regulating the issuance of corporate bonds in the form of private placement in Vietnam.

Following Circular No.77/2020/TT-BTC recently issued by the Ministry of Finance provides guidance on some articles of the decrees above with regard to announcement of bonds issue. The regulations soon will be read in line with the Law on Enterprises 2020 upon its effectiveness, as the case may be. These only govern the bond issues of private companies. Bond issues activities in any form of public company are governed by the Law on Securities 2019, effective on January 1, 2021.

Vietnam allows limited liability and joint-stock companies to issue bonds in the form of private placement, photo Le Toan

Offer for sale

Prior to each offer for sale of the bond, the issuing company is required to make an announcement to the investors who register to purchase the bonds, and inform the stock exchange at least one working day before the date designated to be the offer date. The result of which must be announced within 10 days from the final date of offer for sale.

If bonds purchased by the investors and issued by the JSC are converted into shares, the company needs to conduct the registration for the amendment in charter capital within 10 days from the day on which the conversion is completed.

Requirements on issuance

As corporate bonds function as loans, Decree 163 requires the issuing company to ensure and comply with several requirements before bonds issue. Firstly, the issuing company must have been operated for at least one year since its establishment. Second, the financial statement must be of the one immediate preceding year of the year of bonds issue and audited by a qualified audit organisation. Next, the number of investors engaged in the bonds issues or bond transactions must not exceed the limit of 100 investors.

Fourthly, the bond issue programme is approved and accepted by competent authority. Fifth, the principals of and interest on corporate bonds issued within three consecutive years prior to this bond issue must be fully paid to bond buyers (if any). And lastly, financial safety ratio and prudential ratio are conformed in accordance with specialised laws.

Decree 81 imposes on the issuing company additional conditions before corporate bond issues, including: The consultancy agreement must be signed with the organisation to consult the bonds issuance dossier in pursuant with Article 15.3 of Decree 163, unless the issuing company is also licensed to provide the same services;

The outstanding amount of corporate bonds in form of private placement (including the anticipated number of bonds to be issued) must not by five times exceed the equity of owners at the time of the issuance in accordance with most recent quarterly financial report;

The restriction could possibly purport partly to restrict the leverage ratio and the level of credit downgrades of the issuing company. The maximum debt-equity ratio allowed by the issuing company would be 1:5, meaning five units of debt for every unit of equity.

Each issuance must be completed within 90 days from the day of announcement made of the bond issuance before such issue; any issuance of the following tranches must be made at least six months after the previous one, each of which must satisfy the same terms and conditions.

In addition to the above requirements, JSC issuing convertible and warrant bonds are subject further to requirements. Firstly, the foreign shareholding ownership ratio must be confirmed if the bonds are to be converted into shares or if the investors exercise the right to purchase of the warrant as if prescribed by the laws. Next, each issue of each tranche of the bonds issue programme must be at least six months apart.

Lastly, convertible and warrant bonds must not be transferred within a time frame of at least one year, from the date the issuance is completed, unless the transfer is made for or between professional securities investors or as to enforce the judgment of the court or as inheritance.

The response of the government by adopting additional regulatory requirements have explicitly taken a restrictive approach to reduce the frequency and the density of issuing corporate bonds in private placement by the issuing companies. The effect of this could be to reduce the heating issuance of bonds.

Bond issuance dossier

In addition to what is required under Decree 163, Decree 81 requires dossier of bond issue to include one additional document of the bond purchase agreement under which the investors commit that they have accessed to full public information, prior to the issuance of the bonds and hence thoroughly aware of the risks bearing in purchasing the bonds.

Although what agreed between the issuing company and the buyer may have been already covered in the bond programme approved by competent authority and there has been no regulatory requirement to register this agreement, Decree 81 seems to emphasise the importance of the binding effect of the bond purchase agreement, and knowledge and awareness of investors of the risk involved when they conduct investment activities.

This is based on the principle that the investors are self-responsible for their investment decision and risks undertaken in the market that is vulnerable.

Bond issue announcement

Announcement must be made by the issuing company of the bonds issues before and the result thereof after the issues.

Prior to the date of issue, the issuing company has to announce the information thereof to the investors registered for the bonds purchase and specifically to the Hanoi Stock Exchange (HNX). This effectively means that issuing companies in Ho Chi Minh City will also have to send their announcement documents to Hanoi, either in physical or digital form.

Significantly, the minimum time for the announcement to be made before the bond issue is reduced from 10 to three working days. At least three working days before the contemplated issue of the bonds, the issuing company has to announce the information of the bonds issuance to the investors, who register for the purchase of the bonds, and send the announcement details to the HNX. Any issuances of the following bond tranches must also be announced at least three working days before the issue.

Besides that, if the issue of the following tranche is six months apart from the previous one, the issuing company sends announcement information and documents updating the financial situation of the issuing company and the regime of using the proceeds from bonds issued to the investors who register for the bond purchase and HNX. By this means, JSCs issuing convertible and warrant bonds are bound by this regulation.

The legal representative or authorised person will be the signatory of the announcement documents.

After the issue of the bonds, the result of which must be notified to the investors purchasing the bonds of the company and the HNX, no later than five days after the issuance date.

Period report on bond issues

Any periodic reports of the payment schedule for the principals and interest thereon of the bonds are made every six months and annually of the financial year until when the bonds are matured. Enclosed with the report is the financial statement for the period. Circular 77 sets the deadline by when the issuing company has to submit their period report: no later than 60 days from the last day of the first six months of the financial year.

In conclusion, the new regulations provide a clearer regulatory framework regarding the corporate bond issues in form of private placement by private LLCs or JSCs, particularly on (i) offer for sale; (ii) requirements on the bond issues; (iii) announcement before and after the issue; and (iv) periodic report on the payment schedule status of the issuing company until the bonds are matured. Although the issuing company will be subject to more regulations and formalities, the regulations have invisibly placed issuing companies in a safer condition.