Restoring confidence at centre of bond provisions

The Ministry of Finance (MoF) last week submitted to the government a draft decree amending, supplementing, and suspending the effect of a number of provisions in the decrees regulating the private placement of corporate bonds for sale and trading in the domestic and international market.

Formerly known as Decree No.65/2022/ND-CP dated September 2022, it stipulates the offering and trading of individual corporate bonds.

Particularly, the MoF intends to permit corporations to pay bond principals using other assets. With bonds issued for domestic sale, issuers could negotiate with the bondholder to make payment if they are unable to pay the principal and interest in full and on time according to the disclosed schedule.

“Some corporations, particularly in the real estate sector, have experienced a bumpy road to settling their debt requirements and have resorted to restructuring their debt by offering to pay the bond principal by stocks, while others have negotiated with bondholders to accept property assets as an alternative way,” the MoF said.

Moreover, the draft decree also allows issuers to negotiate to extend the bond’s term.

“In the case of extension, the draft stipulates that the maximum term is no more than two years compared to the issuance plan announced previously,” the MoF stated. “For bondholders who do not accept new terms and conditions, issuers are responsible for negotiating to ensure the interests of investors. If the bondholder still does not accept the negotiation plan, issuers must pay the bond principal and interest in full upon maturity,” the draft decree stated.

Restrictions must be eliminated

The MoF proposes to suspend the enforcement of regulations on determining the status of professional investors as individuals and regulations on mandatory credit ratings until the end of 2023.

“However, the major drawback of this alternative is that a number of investors may continue to purchase corporate bonds due to attractive interest rates without thoroughly considering the possible risks. Hence, management agencies must enhance information transparency and notify investors, as well as bolster oversight and management. This solution’s efficacy is highly dependent on the awareness of investors, particularly individual investors,” the ministry added.

There are only two licensed credit rating agencies in the market today, Saigon Ratings and FiinGroup.

Le Hong Khang, credit rating director at FiinRatings, told VIR that fresh measures such as prolonging the maturity of bonds are to promote market liquidity and assist bond issuers in navigating through uncertainties.

“Specifically, debt deferrals being delayed for up to two years is one of the most plausible recommendations since it gives companies more time to prepare. As for the proposal for businesses to be paid the principal and interest of the bond with other assets, many bondholders are concerned that the issuer will assign debt with unfinished real estate, or in a remote area, which is also extremely inconvenient,” he said.

“Besides boosting liquidity for businesses, it is vital to build a concrete legal framework related to unfinished projects, which is the basis for both bondholders and issuers to meet their requirements,” Khang added.

Le Hoang Chau, chairman of the Ho Chi Minh City Real Estate Association, also believed that the draft amendment, if approved by the government soon, will be a solution for bonds to continue to be an important capital channel for the market.

“Yet, bond settlement is still a temporary measure. It is important to support the management agency’s effort to repeal the statute in order to remedy the liquidity crisis of real estate enterprises. Real estate firms must deliberately reduce the selling price of their projects in order to stimulate bottom-fishing cash flow, which will quickly generate market liquidity,” Chau said.

According to the Vietnam Bond Market Association, there were no corporate bond issuances at all in January when the Tet holiday took place, a stark contrast to a year ago when there were seven issuances of corporate bonds to the public and 16 private issuances, totalling $1.23 billion.

In the opposite direction, last month businesses bought back $339.3 million in bonds, up 56 per cent over the same period in 2022.

The association estimated that the total volume of corporate bonds maturing in 2023 is around $12 billion. Particularly in January, the total value of matured corporate bonds was $720 million, mainly in real estate and construction.

In its corporate bond market outlook report for 2023, Vietcombank Securities (VCBS) assessed that while 2022 already marked the slowdown of the bond market compared to the strong development in previous years, in 2023, it will continue to shrink.

Many bonds are coming to maturity, while the possibility of new issuance and restructured issuance is significantly limited. New issuance costs remain high. In addition, the number of bonds bought back before maturity will also continue to reduce the overall market size.

“However, the tendency to actively repurchase before maturity partly helps businesses and issuers to be more proactive in bond capital payment demand. This also shows significant efforts to arrange capital and relieve pressure on maturity in the near future,” the report said.

Raft of barriers

Overall, high interest rates and investors’ recent loss of confidence in corporate bonds will make the market less attractive considering the risk-profit correlation. For institutional investors, the demand for corporate bonds is forecasted to decrease as the assessed risk level increases.

Along with that, government bonds have returned to an attractive valuation compared to the past, which is also a factor that reduces corporate bond’s competitiveness.

The VCBS report suggested that 2023 is the time to accelerate the restructuring activities of upcoming matured bonds. Discussions on a revision of Decree 65, even if it comes into force, will take time to get market feedback. All in all, VCBS believes that the corporate bond market will continue to be quiet, with low liquidity.

Likewise, a report by FiinGroup cited that a slew of credit-tightening restrictions, along with rising interest rates, has driven firms to seek alternative sources of funding. Specifically, unlisted firms account for more than 80 per cent of the value of corporate bonds issued by the real estate industry, triggering huge dangers of poor financial health and lack of transparency.

FiinGroup also believed that the market may witness more insolvent issuers, particularly firms with inadequate cash flows that have consistently grown their financial leverage within three years.

CEO and chairman Nguyen Quang Thuan said, “We estimate that the knock-on effects from corporate bonds to soured debts and bank credit are not significant due to small scale of because of the scale of banks’ ownership of corporate bonds. Notwithstanding, we are concerned about the cross-effect of an increasing amount of soured loans in banks, as the capital structure of bond issuers usually involves in banks’ financial sources.”

In addition, he noted, there are some issuers also redeem their debts before maturity, and the number of individual investors also reduces, which is a positive sign for the market in 2023. “The sharp decline in new issuance in recent times does not come from legal modifications like Decree 65, but from lack of information transparency and individual investors’ lack of confidence,” Thuan said.

A set of synchronous solutions is mandatory to boost investor confidence. For instance, in the real estate sector, what investors are afraid of is the legal risk of projects - thus developers should thoroughly address these concerns.

“I expect a more open and transparent corporate bond offer to the public, particularly issuers with solid foundation and good corporate governance,” Thuan added. “Credit rating is one of the measures for information transparency and laying a great foundation for a healthy financial market. Investors could also make their own decisions based on independent evaluation.”

FiinGroup also expects that in 2023, more businesses would successfully issue and mobilise green bonds in line with international standards.

The Vietnamese financial market has experienced a bumpy road since the beginning of 2022 due to violations in the issuance and trading of corporate bonds of large corporations such as Tan Hoang Minh and Van Thinh Phat. The confidence of investors is at such a low level that many are willing to sell corporate bonds at any cost to collect money at a high discount.

While the bad debt market in Vietnam is still in its infancy and positive conditions have converged, stronger steps need to be taken.

According to data from the Vietnam Bond Market Association (VBMA), the total value of corporate bonds reaching maturity from now until the end of this month approximates $760.8 million, mainly concentrated in the real estate and construction sectors.

Nguyen Van Than, member of the National Assembly (NA) Economic Committee and chairman of the Vietnam Association of Small- and Medium-sized Enterprises, highlights the need to tackle the obstacles in the corporate bond market quickly to ensure the success of the 2023 development targets.