FiinGroup’s statistics indicate that by 2022 and 2023, respectively, there will be over VN35 trillion and over VN61 trillion in matured real estate corporate bonds, most of which come from unlisted businesses.

Risk of cash flow disruption

FiinGroup’s statistics indicate that by 2022 and 2023, respectively, there will be over VN35 trillion and over VN61 trillion in matured real estate corporate bonds, most of which come from unlisted businesses.

After the scandals involving Tan Hoang Minh, An Dong, and VKC Holdings, many investors began to be more cautious when purchasing corporate bonds and hurried to demand that issuers buy back bonds before they mature.

According to information provided by the Vietnam Bond Market Association (VBMA), the total amount of bonds repurchased by firms grew 46% from the year's beginning to VN142.56 trillion.

Many issuers are forced to expand bond buybacks before the maturity date under investors’ pressure. What will happen if businesses experience liquidity problems and are unable to make bond principal and interest payments while they are unable to access capital to restructure bonds?

Mr. Phan Le Thanh Long, financial analyst, said that the continuous operation of a bond issuer is similar to that of a consistently driven automobile. The ability of a business to generate cash flow to pay bond debt due so long as it is operating and not at risk of defaulting or filing for bankruptcy during the upcoming 12 months is referred to as "continuous operation. But for some reason, the business is unable to run profitably, making it difficult to settle the bond debt.

"Based on my involvement in a large international organization-funded project that assisted Vietnam in 2011–2013 in handling bank bad debts, there is a general rule in handling bad debts, including commercial bank loans and corporate bonds, that government agencies won't, or rarely, use money. The moral hazard and macro factors like inflation make it impossible to use public funds for this purpose. As a result, it is not feasible for the Ministry of Finance to create an entity to handle distressed bonds. So, in order to fulfill the bond obligation, the enterprises must continue operating ", Mr. Phan Le Thanh Long stressed.

Handling distressed bonds

Mr. Phan Le Thanh Long added that the real estate sector saw an increase in bad loans for banks in 2012. At that time, it was widely believed that a company to handle bad debts was necessary, and the Ministry of Finance had an affiliated debt trading company, known as DATC. The bad debt company that DATC has selected as a test case has successfully undergone reform and attracted investors. Binh An Seafood JSC is what it goes by.

But from 2011 to 2013, the State Bank of Vietnam, not the Ministry of Finance, was in charge of handling bank bad debt. Furthermore, the DATC's capacity at the time wasn't enough. As a result, the National Assembly passed Resolution No. 42 in 2013 to handle bank bad debt, and the Vietnam Asset Management Company (VAMC) was established. The bank temporarily transferred its bad loans to VAMC in exchange for the special bonds that VAMC had issued. This implies that instead of making immediate provisions for bad debts, which would result in commercial banks failing to maintain the safety ratio, commercial banks have time to gradually deal with bad debts and continue lending, ensuring continued operation. In five years, commercial banks must make provisions for special bonds.

How should distressed bonds be handled so that the issuers may continue to run smoothly and pay off the debt? The debt trading company can now act as a corporate restructuring entity in the manner described below.

Bank bad debts and corporate bonds are handled very differently

First, the debt trading company might ask investors to contribute capital (social capital, not public capital), purchase debt from businesses that need to be restructured by issuing "notes" (similar to VAMC's special bonds), and help businesses run smoothly and pay off debt. In other words, capital is transferred from suppliers to the required location.

Second, for restructuring reasons, distressed bonds from a given project may be divided up. A similar approach was developed by the debt trading company to solicit capital contributions from investors, particularly those with an interest in the project's assets, mainly real estate. By doing this, the project's assets are put back to use while also generating income for bond repayment.

"Not all corporate bonds can be restructured. Bonds can be combined into a product, referred to as a distressed asset, by a debt trading company, and offered to investors, including foreign investors, on stock exchanges with a viable restructuring plan. If three out of 10 distressed corporate bonds are restructured while the rest are rejected, the effort was successful. It matters to have an attreactive  discount", said Mr. Phan Le Thanh Long.

In Mr. Phan Le Thanh Long’s opinion, bank bad debts and corporate bonds are handled very differently. The government agency does not need to use public funds; rather, the time and the restructuring plan are required to support enterprises in operating constantly.

"It is noted that no nation relies solely on bank credit. A thriving capital market is crucial, especially for the bond market. Therefore, it is crucial to have a strong legal system that encourages transparency and expands the bond market. And in order to retain the public's confidence in corporate bonds, backup options are needed to handle distressed bonds if they materialize in the least expensive method with the least loss", said Mr. Long.