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April 21, 2023

Recent Changes in Requirements Applicable to Corporate Bonds Issued in Vietnam

In the context of low investor confidence in the bond market due to recent negative news and the difficulties in cash flow of bond issuers, especially those in the real estate and banking sectors, the government of Vietnam has taken action to address legal bottlenecks in order for the bond market to recover and develop sustainably. In contrast to the gentle hand offered to bond issuers shouldering the debts of corporate bonds, a more stringent approach is being applied to bond purchases by banks. This is being done to mitigate the negative impact of the bond market on Vietnam’s banking health.

New Decree Loosens Requirements for Bond Issuers

On March 5, 2023, the government promulgated Decree No. 08/2023/ND-CP (“Decree 08”), which took effect immediately, loosening requirements for bond issuers. The key changes under Decree 08 include the following:

1. Ability to negotiate repayment of bonds with in-kind payment: For corporate bonds in the domestic market, Decree 08 allows the bond issuer to negotiate with bondholders to make payment in assets other than cash if the bond issuer is unable to make full and timely payments of bond principal and coupon in VND according to the announced bond issuance plan. There are certain conditions which must be satisfied, such as bondholders’ consent, disclosure of the changes, and legal status of the assets used for payment (e.g., title, encumbrances, and material agreements involving the assets).

2. Ability to change terms and conditions of bonds: Previously, while, bond issuers were able to change the terms (such as extension of the term or use purpose of the bond proceeds) for corporate bonds issued after September 16, 2022, they were not allowed to do so for older corporate bonds. Now, Decree 08 allows the bond issuers to change the terms and conditions of the older bonds, subject to some conditions such as corporate approval and bondholders’ approval (i.e., representing at least 65% of total outstanding bonds). For bondholders who do not agree to the changes in terms and conditions of these older bonds, the issuer must honor its obligations according to the initial bond issuance plan unless an agreement with those bondholders is reached.

In practice, Novaland has already effectively applied this new regulation, reaching agreements for extension of the payment timelines with regard to two bond issuances worth VND 1.75 trillion (USD 74.4 million) with BIDV Securities Company (BSC) and Petrovietnam Securities Inc. (PSI) as bondholder representatives. In addition, in the first quarter of 2023, according to news media, 69 companies failed to make timely principal and yield payments on their corporate bonds, totaling about VND 19.2 trillion (USD 819 million). Of these, 23 issuers, accounting for 50 percent of late payments, plan to negotiate with investors and report to the Hanoi Stock Exchange, the agency responsible for managing the bond and derivatives markets. Accordingly, Decree 08 has given legal grounds for the bond issuers to renegotiate with bondholders, in order to reduce pressure from these older bonds that are maturing.

3. Suspension of certain requirements: Decree 08 suspends the verification method of professional investor status, distribution time limits, and issuer credit ratings under Decree No. 65/2022/ND-CP until December 31, 2023.

Draft Circular Proposes More Restrictions for Banks in Purchasing Corporate Bonds

On March 29, 2023, the State Bank of Vietnam circulated a draft circular amending and supplementing Circular No. 16/2021/TT-NHNN (“Circular 16”) regulating the sale and purchase of corporate bonds by credit institutions and branches of foreign banks (“Draft Circular”). This Draft Circular is currently open for public opinion and aims to address risks to banks purchasing corporate bonds on the domestic market (i.e., VND bonds) with the following proposed changes:

1. Tighter requirements for bond purchase: The Draft Circular tightens the requirements for credit institutions to purchase corporate bonds, limiting the type of corporate bonds available for purchase, such as (i) the debt-to-equity ratio of the bond issuer must not exceed five times the owner equity; and (ii) the bond proceeds are not used to contribute capital or buy shares/capital contribution in other companies or for business cooperation or co-investment with other companies. This prohibition against using bond proceeds for M&A activities under the Draft Circular would be different from the ability to borrow foreign loans to fund business plans or investment projects of investee companies under Circular No. 12/2014/TT-NHNN.

The Draft Circular also proposes certain requirements applicable to credit institutions, which include responsibilities to control the funds, verify the use of funds by the bond issuers, and track the bond issuer’s compliance.

2. Suspension of buyback period: The Draft Circular would temporarily suspend Article 4.11 of Circular 16 until December 31, 2023, which stipulates that credit institutions may only purchase unlisted corporate bonds that they sold at least 12 months after the sale of such bonds. Accordingly, credit institutions may buy back unlisted corporate bonds from the effective date of the Draft Circular until the end of December 31, 2023, without waiting the aforesaid 12 months.