Overview of Vietnam’s corporate bond market
For the past few years, the corporate bond market has experienced a surge in issuance value. This was mainly attributed to Decree 163/2018/ND-CP (“Decree 163”), which was promulgated to encourage corporate bond issuance, hence containing relatively lax requirement for bond issuances. However, such lenient policy has resulted in abuse, with bonds being issued without securitization and on high risk terms in mass numbers. Companies have turned this instrument into a relatively unregulated new credit channel without being subject to strict lending regulations risking their own financial stability, especially with real estate companies issuing bond volume far exceeding their charter capital (in some cases up to 100 times). This creates a sudden and massive risk to the capital market, especially for bond holders who are too often hold asymmetric information as to the terms of the bond. In response, the Government issued Decree 81/2020/ND-CP to reduce such risks.
Corporate bond market after Decree 81/2020/ND-CP
On 9 July 2020, the Government issued Decree 81/2020/ND-CP (“Decree 81”) to amend Decree 163.
In total, Decree 81 amended and supplemented 14 provisions of Decree 163, aiming at providing strict and prudent control over the private placement of corporate bonds in the wake of an uncontrolled proliferation in the amount and risk of issued corporate bonds over the past two years with the following notable contents:
Firstly, Decree 81 now imposes strict limits on the total outstanding debt on corporate bonds issued through private placement to not exceed 05 times the owner’s equity. Effectively, bond issuers cannot leverage further using bond issuance if their outstanding total bond debt is already too high. This is expected to make further bond placements safer, and potentially reduce risk of defaults as bond issuers are now required to have healthier liquidity.
Secondly, Decree 81 mandated a minimum gap period of six months between bond issuances – that is, companies can now only issue bonds six months after the completion of the previous issuance. Furthermore, issuances must be completed within 90 days from the date of public issuance.
The main purpose of this policy is to prevent the excessive issuance of high-risk, high-reward short term bonds which have high risk of defaults – as now companies may only make a maximum of two bond issuances per year, it is expected that they will now issue bonds with greater considerations. The hope is that the excessive issuance of corporate bond will be better controlled and that companies now resort to corporate bond only when they have real need for capital. Cash flow would therefore be directed to production and business activities, avoiding the situation of capital being misused, causing potential risks for this market.
In addition, this rule would now curb the practice of companies who issue bonds with higher coupon rates, and in turn use the amount sold to pay off bank debts or redeem earlier bonds that have reached maturity.
Thirdly, Decree 81 also requires bond issuers to publish and consolidate sufficient information on corporate bonds and report to the Stock Exchange. This is a policy to help the issue of assymentric information between issuers and small, inexperienced investors. Previously, small individual ínvestors are often at the mercy of the issuers, as they lack information as to the bonds which they are buying. This has resulted in abuse, with multiple issuance of high-risk high reward bond seeking to tempt these small investors. This regulation has now injected a dose of transparency into the bond market, hopefully will protect small investors and also provide safeguard to the system. .
Last but not least, bond issuers are now required to enter into consulting contract with a licensed consultant to issue bond dossiers.
The new legal framework took effect on 1 September 2020, and has significantly tightened the requirements on bond issuance. Accordingly, it is advised to be extra careful and due considerations to be taken when issuing new bonds, as the coupon rate and the frequency of issuance have now been restricted.
This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.
By Dr. Le Net – Partner