Decree No.08/2023/ND-CP has allowed the local issuer to negotiate with the bondholders to repay/pay due principal/interest in form of other assets, subject to three rules. Firstly, such repayment/payment must comply with the provisions of civil law and relevant laws.

Ngo Thai Ninh-Senior associate Baker McKenzie Vietnam

In addition, such repayment/payment must be approved by the bondholders. Finally, the issuer must disclose information on an extraordinary basis and take full responsibility for the legal status of the assets used to repay/pay the bond principal and interest in accordance with the law.

These regulations have created a mechanism for the issuer and bondholders to negotiate on payments, thereby helping to reduce the risk of default in the context of a low level of liquidity in the market, especially in relation to some real estate developing issuers.

For example, Novaland Group sent a letter to bondholders regarding VND1 trillion ($42.17 million) worth of bonds, of which the maturity date fell on February 12, 2023; it proposed a plan to extend the principal payment term in a suitable time or swap the bond principal for real estate products.

Real estate is also an offer that Egroup, the parent company of Apax Holdings, has reportedly given to its bondholders to swap its bond payments for.

However, the bondholders would again be disadvantaged, exposed to the risk of mis-valuation of the assets to be swapped, given assets have considerably low liquidity in the context of the unpredictable volatility of real properties prices currently, or even in the future.

Furthermore, from a legal perspective, in the case of debt payment extension, the rights and obligations of related sides are substantially not changed; but in the case of a bond swap for assets, the nature of the relation between bondholders and bond issuers will be completely refashioned. The payments in the form of other assets other than cash (for example real estate products) will convert the underlying financial transactions of lending and borrowing into the transactions of buying and selling assets.

Such asset transactions must then satisfy regulatory and contractual requirements applicable to certain types of assets. In real estate project financing practice, real estate developers often mortgage their assets (which usually come in a package of project land use rights and houses and construction works attached to the project land) for bank loans, so the ‘real estate products’ offered for swap might not be freely transferred right away.

Such a swap may be a tempting offer, but bondholders may need to consider the time and effort they are going to invest to get that real estate.

Extensions and protections

The previous regulations did not allow the issuer to change the term of the issued bonds. However, Decree 08 has now permitted the issuer to extend the maturity of the issued bonds, provided that the new maturity shall not exceed two years as to the original maturity as announced to the bondholders.

Together with payment in form of other assets, permissible extension of maturity of the bonds is a clearly specialised regulation, which may mitigate short-term risks of cross-defaults in the financial market where the issuers are under various obligations owing to different creditors, especially, commercial banks. If bondholders insist on immediate cash payments yet the issuers fail to settle, such failure will trigger cross-defaults in the bank loans.

A worse case will occur if issuers continue to fail to pay the banks, and the bank loans shall consequently become bad debts. The issuers would then have extremely limited access to loan capital sources to develop their projects generating cash flow, and they would be sinking deeper and deeper into the financial mire.

Although the issuer now has the right to negotiate with the bondholders to amend or adjust the T&Cs of the bonds under Decree 08, for bondholders who do not agree to change the bond’s T&Cs (including term extension of issued bonds for up to two years), the issuer shall be responsible for negotiating to ensure the interests of such bondholders.

If any bondholder does not accept the negotiation plan, the issuer must fulfil all obligations towards such bondholder pursuant to the original issuance plan announced, regardless of the changes to the T&Cs of the issued bonds having been approved by bondholders representing 65 per cent of total issued bonds.

This requirement accidentally creates uncertainty in the implementation of the T&Cs and may go against the agreement between the issuers and the bondholders from day 1. It is commonly seen in the market that the T&Cs include a clear mechanism to get the bondholders’ consent for any matter relating to the bonds, including any amendment to the T&Cs.

A majority approval of 75 per cent of bondholders participating in a bondholders’ meeting, or all bondholders if the matter is passed by way of seeking written consent from bondholders, is generally accepted to pass any important matter in relation to the bonds, including an amendment to the T&Cs. It is not a market standard and will not work in practice to mandatorily get unanimous consent of all bondholders for any amendment to the T&Cs. It seems that the market will have to wait for further guidance from the government to deal with a scenario of disagreement by a minor investor or a group of minor investors, so that the interest of not only minor investors but also majority investors will be protected.

The previous regulations did not allow the issuer to change the term of the issued bonds, photo Le Toan

Scrapped provisions

Some provisions of the previous legislation (Decree No.65/2022/ND-CP and Decree No.153/2020/ND-CP) have been cancelled until the end of 2023. These are provisions on determining the status of professional securities investors for individuals; provisions on the long stop date for issuance of bonds no later than 30 days from the date of pre-issuance info disclosure; and provisions on credit score applicable to the issuer.

These stringent requirements on the private placement of bonds were originally introduced with the aim to building up a more transparent and sustainable bond market. However, in the context of the low level of liquidity, lifting the provisions on determining the status of professional securities investors for individuals will bring new players into the market and, therefore, improve liquidity.

The corporate bond market previously played a critical role in the Vietnam economy until the current crisis in the market in relation to certain issuers. It seems that, with the effort to support the restructuring of issuers in the market, especially real estate issuers, the government is trying to lift certain strict conditions for corporate bond issuance such that the issuers will be in a more comfortable position to get access to the bond capital.

Notably, the above requirements will only be put on hold until the end of the year, as a test for the government to see the positive and negative impacts on the market. Further guidance may be expected subject to reactions in the bond market in the near future.