The lackluster atmosphere extended from January to February 2023 when only two companies issued corporate bonds with a total value of VND2,000 billion. Masan Group Joint Stock Company sold VND1,500 billion of 5-year bonds at a coupon rate of 9.5% per annum. Earlier, in January, there was only one batch of bonds worth VND110 billion issued privately by a leading construction firm.

Key changes in the regulatory framework for corporate bonds

In contrast to dull issuing activities, maturity pressures in 2023 are heating up day by day as VND252 trillion of bonds will become mature in the year, a sharp increase of 64% over the same period, including nearly VND160 trillion in the second and third quarters. Property firms account for 43% of maturing bonds or VND110 trillion.

The big decline in bond issues was attributed to the unfavorable market due to weak supply and demand. As of March 5, according to the Hanoi Stock Exchange (HNX), 46 companies announced delays in coupon or principal payment for their bonds.

Issuers that have not yet faced maturity pressure are still waiting for the market to be stabilized and regulations to be clearer. They also expect interest rates to cool down in the coming quarters to optimize capital structure and cost.

The government issued Decree 08/2023/ND-CP dated March 5, 2023 (Decree 08) which amends, supplements and ceases the effect of some articles of decrees on the offering and trading of privately placed corporate bonds in the domestic market and offering of corporate bonds to the international market. It is expected to remove existing difficulties and help make the corporate bond market transparent, strong, safe and sustainable to become an important medium- and long-term fundraising channel for the economy.

According to experts, in essence, provisions of Decree 08 are not new and have been applied by issuers for a long time because when they are already in a difficult situation, they must actively start negotiations with bondholders. However, Decree 08 is also well received because there is an official legal corridor for them to issue agreements with investors.

Accordingly, salient points in Decree 08 include:

First, issuers are allowed to extend the maturity term up to a maximum of two years, compared to the originally announced term in the issuance plan. However, if bondholders do not accept, issuers still have to pay principals and coupons in full.

Second, if they fail to settle bond payments in Vietnamese dong, issuers can pay it with other assets such as apartments, townhouses, villas, land and valuable papers, on the condition that bondholders accept this option. They must disclose extraordinary information and take full responsibility for the legal status of assets to ensure lawful and legitimate rights and interests of bondholders in order to limit lawsuits and disputes emerging later.

Third, cease to be effective until December 31, 2023 of the following contents: (i) determining the status of a professional securities investor as an individual with a portfolio value of at least VND2 billion within 180 days; (ii) bond distribution period (applied period of 90 days to the end of December 31, 2023, the period will be 30 days from January 1, 2024); and (iii) credit rating. For corporate bonds offered to the public, credit ratings are still applied according to Decree 155/2020/ND-CP which guides the enforcement of the Law on Securities.

Challenges remain

Expressing concerns about the newly adopted Decree 08, Mr. Nguyen Tri Hieu, an economic expert, said that the decree will not solve the crux of existing problems in the bond market - rebuilding investor confidence, but it may increase market risks - encouraging retail investors to turn their back to the bond market as before.

“Decree 08, while loosening regulations for individual investors to enthusiastically return to the market, does not build a hedge against risks. It seems that we have not learned any lessons from such cases as Tan Hoang Minh and Van Thinh Phat,” he said.

Concurring with this point of view, Dr. Dinh Trong Thinh, a senior lecturer at the Academy of Finance (Ministry of Finance), said that the temporary extension of conditions for professional investors in Decree 65 will be only effective at the end of 2023. Hence, some investors who have not reached the professional status specified in Decree 65 will buy bonds in the market in nine months. However, the maturity term of corporate bonds is at least 2-3 years.

“So, how should investors handle bonds they are keeping at the end of the year when they are no longer a professional investor,” he noted.

Besides, analysts said that the exchange of assets is not really easy. Accordingly, bond buyers are worried because investors will offer products that are in stock, unmarketable or under construction.

Meanwhile, at present, real estate firms seriously fall short of cash flows. In case their projects are not granted a certificate of acceptance for completion and operation and are not certified for ownership as a result, bondholders will face numerous difficulties in selling these assets.

Real estate companies are also finding it hard to reduce selling prices to boost demand and ease pressures, because most of them are currently using too much financial leverage for operation and most of their projects are mortgaged at banks as well as collateralized for bond issuances. Lowering selling prices also means that this collateral will be significantly reduced in value and banks will require additional security.

Furthermore, extending debt repayment causes investors’ money to be trapped for up to two years and bondholders to shoulder compound interests. If market difficulties persist, they will also find it difficult to repay loans. Faced with the exposure to bond default, every bondholder wants to squeeze the debt, as quickly as possible, and wants to get out before the fire spreads.

Anyway, experts also hoped that investors will cooperate with companies in the vital period because if companies continue to exist, banks will reduce their bad debt ratio and a potential “domino effect” will be avoided.

The introduction of Decree 08 only reduces repayment pressures of matured bonds in 2023-2024, and at the same time, gives issuers more time to restructure their finances and rationalize their selling plans and policies for early repayment. This is only a contextual solution and there will thus be a need for regulations that will result in radical changes for the market to develop more sustainably.