Vietnam has walked back some of the tighter standards it imposed last year for corporate bond issuers, amid concerns that they could cause a liquidity crunch.
Decree 65, passed on September 16, tightened requirements for the issuance of privately placed bonds, which account for more than 90% of all corporate supply onshore, after some issuers from the property sector were believed to have used bond proceeds for purposes other than those outlined in their prospectuses. In October, Truong My Lan, the chairwoman of real estate conglomerate Van Thinh Phat Holdings Group, was arrested on suspicion of financial fraud related to bond issues in 2018 and 2019.
The new rules limited corporate issuers to using proceeds in specific ways and required them to follow a disclosed bond issuance plan. Investors can require issuers to redeem bonds early if the plan has not been followed, or if the issuer has breached other regulations.
Decree 65 also included the introduction of a centralised exchange for the registration and trading of bonds, which is targeted for launch by June, as well as shortening the timeline for bond issuance to 30 days from 90 days.
However, the changes came as many companies were feeling liquidity pressure and made it harder for them to tap bonds as a source of funding.
“Vietnamese real estate developers do not have access to sufficient long-term funding to support their land-banking activities,” warned Michael Kolakari, chief economist at Vietnamese investment firm VinaCapital, in a note on March 2, noting that many developers had in recent years funded themselves by issuing two-year bonds, predominantly to individual retail investors.
Maturity extension
Decree 8 on March 5 this year walked back some of the changes, giving issuers more flexibility in managing their existing debt, and delaying the introduction of some of the other requirements.
Under Decree 65, bonds issued before September 16 2022 could not be extended. The amendment allows issues to extend the maturity of existing bonds by up to two years. In addition, issuers may choose to pay the bond principal and coupons in assets other than cash, as long as bondholders agree.
In order for the bond terms and conditions to be changed, holders of at least 65% in principal of the bonds must agree. If the threshold is met, any bondholders who did not agree to the changes must be repaid on the original terms.
Property developer No Va Land Investment Group was the first to take advantage of the changes, obtaining approval from holders of 99% of its D1trn (US$43m) 10.5% bonds to extend the maturity by two years and add security, after it failed to repay them at maturity on February 12.
Others could follow, given the large amount of refinancing needed this year. Around US$12.8bn of corporate bonds are maturing this year, of which US$5bn are bank bonds.
Around 80% of the bonds maturing in 2023 and 2024 are from property companies and financial institutions, according to Vietnam Investors Service (VIS Rating), one of two credit rating agencies in Vietnam.
“We have seen a pick-up in new bond issuances following the rollout of Decree No. 8 in March, which is a positive sign that the bond market liquidity is beginning to recover,” said Simon Chen, general director in VIS Rating’s ratings and research team. “However, the market is facing significant bond maturities over the next few quarters, and many issuers have an urgent need to refinance or extend bond maturities in order to avoid defaults. Investor sentiment remains weak, and hence, it will be challenging for issuers seeking liquidity.”
Deferred ratings
Decree 65 required issuers to obtain credit ratings to sell bonds from January 2023 if the total principal amount of bonds they issued in the preceding 12 months was greater than D500bn or more than 50% of company equity. Issuers of secured bonds require third-party valuations of the security.
The new decree pushed that requirement back to January 2024, so Chen at VIS Rating, in which Moody’s owns a 49% stake, does not expect any meaningful pick-up in demand for credit ratings until then. Vietnam’s other rating agency is FiinRatings, which is a technical collaboration partner of S&P.
“On the one hand, the delayed rollout will allow individuals to continue to invest in risky bond assets, which will, in turn, support the demand for private placement bonds in the primary market, as well as secondary market transactions,” said Chen. “On the other hand, the lack of credit ratings in the bond market will mean that individual investors will need to rely on other information sources to assess bond risks and make informed investment decisions.”
Also delayed is the introduction of criteria to define professional investors and ensure that they are the only ones who can buy private placement bonds. Individuals, mostly mass retail investors, bought 31% of bonds issued in the first nine months of 2022, behind only banks with 44%, according to date from the Hanoi Stock Exchange.
Under the new rules, retail investors are deemed to be professional investors if they hold a portfolio of securities worth at least D2bn, based on the average over the previous six months. The certification is valid for three months.
Decree 8 has pushed back the implementation to January 1 2024 from September 16 2022, giving retail investors time to move money around to try to meet the requirement. Retail investors who do not meet the criteria to be classed as professional investors can still buy bonds through public offerings, which have higher standards for issuers, such as requiring the bonds to be listed – though the measures in Decree 65 closed the gap in disclosure requirements between the two markets.
Shrinking investor base
Still, the new rules are expected to shrink the investor base for bonds.
Banks, which are both investors and issuers of bonds, will benefit from higher standards for issuers, but the new rules could also hinder their issuance.
“For banks, Decree 8 didn’t really solve their problem completely, but it does establish a legal framework for bond issuers and bondholders to resolve disputes,” said Nguyen Quang Hung, economist at local asset manager Dragon Capital. “In addition, Decree 8 serves as the foundation for amending other circulars and decrees in the future.”
One remaining requirement under Decree 65 is posing a problem to banks in particular. Companies wishing to issue new bonds need to obtain an opinion from an audit firm stating that they used the proceeds from their previous bond issue in accordance with the use of proceeds stated at the time.
“In Vietnam, no audit firm wants to sign to confirm that,” said Nguyen. “Banks who issued earlier are limited because they lack the audit firm opinion. That means the US$5bn of bank bonds maturing in 2023 may be refinanced in other ways, maybe through long-term deposits.”
Even though new issues raised almost US$1bn-equivalent in the domestic bond market in March, the audit opinion looks to have been a sticking point for issuers.
“Companies who issued bonds in March were all new names because they don’t need the audit opinion,” said Dragon Capital’s Nguyen.
If access to the primary market remains difficult, refinancing pressure will build. Those that can use a two-year maturity extension to sell assets or complete projects will be able to deleverage, but others could still struggle to repay debt.
“We are keeping a close eye on Vietnamese corporates in case there are some restructuring opportunities,” said a source at a restructuring advisory firm in Singapore.
The government has talked about establishing a task force to tackle bad loans, but has yet to give details of what that will entail.
“We believe bad debt will peak in Q3 or Q4 this year because it takes time for bad debt to show up on the balance sheet,” said Nguyen.
Meanwhile, the State Bank of Vietnam has begun cutting rates, taking the opposite tack to most central banks globally. On March 14, it became the first central bank in Asia to cut rates this year, lowering its rediscount rate to 3.5% from 4.5% and lowering certain interbank rates by 100bp.
More accommodative policy could make property investment more attractive, while lower deposit rates at banks will encourage people to put their money in bonds instead.
While the new rules for bond issuers may cause some bumps in the road, they are viewed as a positive measure in the long run.
“It’s a healthy detox for the whole financial market because the Vietnamese corporate bond market has developed so fast,” said Nguyen. “In 2018 the [outstanding] corporate bond market was less than 2% of GDP. In 2022 it was nearly 14%.”