Key issues for debt restructuring in Vietnam

Freshfields Bruckhaus Deringer lawyers provide an insight into debt-to-equity swaps involving a foreign creditor and a Vietnamese company.

Many Vietnamese companies remain under pressure to repay their debts. If a Vietnamese company has not repaid any debt within three months from the due date, then Vietnamese law considers it to be insolvent and there is an obligation for it to file a bankruptcy petition under the Bankruptcy Law.

The Bankruptcy Law, however, has been rarely used, whether by debtors or by creditors. The bankruptcy process is time consuming and unpredictable and, during a bankruptcy proceeding, both the debtor and creditor lose the control over the business to the judge and/or the receiver which, in many instances, may not be well-versed in the relevant business.

Companies and creditors, therefore, may decide instead to implement an out-of-court restructuring. A common form of restructuring is a debt-to-equity swap, where the lender exchanges debt in a company for an equity stake in that company or elsewhere in its group.

This briefing focuses on debt-to-equity swaps involving a foreign creditor and a Vietnamese company. This is because there are more complications to consider if the creditor is foreign. We also briefly consider some other options and key challenges in case where a debt-to-equity swap is not feasible.

Identification of appropriate business/assets for swapping

The first key issue is whether the company and its creditors are able to identify the business and assets which are suitable for a swap. Some key considerations that creditors should consider are:

- Whether there are any businesses and/or assets that the creditor is interested in or comfortable with owning and managing;

- Whether the desired businesses and/or assets are “clean” enough (i.e. not heavily encumbered etc.) and can be exchanged for the debts;

- Whether an exchange is feasible from a legal, commercial and operational perspectives.

The creditor may need to undertake some high-level due diligence in respect of the target business and assets to establish whether such business and assets are appropriate for a debt-to-equity swap.

Structure

The second key issue is to determine the structure of the debt-to-equity swap.

Vietnamese law generally allows companies to issue shares in exchange for contributions in-kind, which could in theory include relinquishment of a debt.

In respect of public companies, the Government's Decree 155/2020/ND-CP dated December 31, 2020 implementing the Securities Law expressly permits public companies to issue shares for debt conversion, subject to certain conditions.

The bond regulations also explicitly allow the bond issuer to repay bond principal/interests by non-cash assets. That said, contributions in kind in non-public companies are not common although it is in theory possible under the Enterprise Law.

In some circumstances, the lender may want to have an economic exposure to the most valuable operating assets of a group instead of the holding company. Direct swaps may not work in this case. In practice, sophisticated parties can come up with creative indirect swap methods. The debtor may, in exchange for terminating a loan, swap such loan with shares/capital in one of its subsidiaries, for example.

There are various ways and means to do it, but the key steps would generally include (a) the liability being transferred out of the lender’s hands and (b) the liability becoming the debtor’s intra-group liability. This arrangement could work for bond issuances as well, provided that the bond transferee is eligible for purchasing the bonds (e.g., the bond transferee must be either a professional securities investor or a strategic investor (as the case may be) and, if the bond issuance plan provides for any other conditions, the bond transferee must satisfy such conditions).

Tax is a major consideration. To give an example of one issue, if the consideration for the transfer is off-set using the receipt of shares (rather than a cash payment), there are divided views among tax officers regarding whether there is a basis for tax deductions when those same shares are sold in the future.

M&A considerations

The creditor is in effect buying a stake in a Vietnamese company, so there will be usual M&A considerations for the creditor, e.g.:

Pre-swapping restructuring

The debtor may not have hundreds of subsidiaries or clean assets which are free to be selected for the swap. So, before the swap, the debtor group may need to undertake some internal restructuring. If the entity to be acquired is subject to foreign ownership limitations, this may cause complications for the restructuring that will need to be addressed prior to the swapping occurring.

Valuation

One of the main concerns for a debt swap (and perhaps all M&As) is whether the target in question has sufficient value, including to account for the outstanding liability in question.

Other stakeholders

The target may be owned by various shareholders/members and the debtor may be only one among them. The other shareholders/members may be hostile towards the new investor, particularly if they are sceptical of the new investor’s ability to contribute to the business operations of the target.

Due diligence

This typically entails financial, tax, legal due diligence, and possibly specialist due diligence (depending on the business of the target). Bearing in mind that this acquisition is occurring because the debtor was unable to pay the creditor money, if there are material issues uncovered in due diligence then these may need to be fixed rather than dealt with by way of contractual mechanisms which rely on payments of money as the solution to the problem.

Corporate governance

Heavily negotiated matters often include: (i) board representation; (ii) key personnel nomination; (iii) voting rights and reserved matters; (iv) pre-emptive rights; (v) tag-along or drag-along rights; and (vi) call and/or put options (exit provisions are discussed further below).

Regulatory approvals will also likely be required and we cover those in more detail below.

Managing other creditors

The next challenge is managing other creditors of the debtor.

In practice, for an out-of-court restructuring, co-creditors blocking each other’s actions could be a problem. It can be very challenging to get consents from all relevant creditors. As such, sophisticated investors will usually negotiate terms which stipulate the rights and obligations of creditors and may allow for a majority creditor to make key decisions on behalf of all creditors, save that minority creditors may also have certain consent rights.

Creditors of different classes of other debt instruments may also need to be considered. Those creditors may be secured or unsecured. If they are secured then they may be secured by the same assets by which the foreign creditor is secured, in which case understanding their position and their ability to enforce that security is crucial. It is worth noting that different creditors may have different agendas, and some of which may not be driven by purely commercial reasons.

If they are unsecured, but the foreign creditor is secured, then that may place the foreign creditor at an advantage. But it is important to bear in mind that the Bankruptcy Law gives certain rights to petition for bankruptcy to unsecured (and partially secured) creditors so strategising an approach prior to execution is important.

If the debtor is truly in a distressed situation, then all creditors should assume that it will not be easy to get the undivided attention of the relevant working teams for long, if at all.

And managing the investment after swapping

The creditor initially held debt instruments; now it holds equity instruments and may be expected to run the business or at least participate in board meetings, etc.

If the creditor is in the same industry as that of the target and has sufficient manpower on the ground, it may have the capacity to run the business without too many difficulties. That being said, it is not always the case, so the creditor may need to consider transitional services or ongoing service agreements with a third party or the debtor’s group to ensure as little disruption to the business as possible.

Exit

Needless to say, how the creditor will exit its investment is one of most important issues to consider.

Notwithstanding that the debtor may be in a distressed situation, the creditor may insist on a put right allowing it to put the investment back to the debtor in exchange for the amounts it is owed (including interest). On the other hand, there the asset has particular value to the debtor, it may seek a call option to buy the asset back once sufficient finances are available.

That said, the creditor will want to be able to sell the investment to third parties as well. Whether the debtor has a right of first offer/right of first refusal in those circumstances and/or, assuming the debtor remains a shareholder in the asset, drag and/or tag rights apply will depend on the dynamics and facts of the deal.

In our experience, terms on exit are among the most heavily negotiated on any restructuring.

Consents and approvals

Although this issue may not be as interesting as the others, understanding and game-planning all the relevant consents and approvals that may be required is an important aspect of any restructuring. Certain terms of the restructuring may need to be publicly disclosed and certain steps may need regulatory approval before they can proceed.

Although exactly what is required will vary greatly on a case-by-case basis, the following may be relevant:

Corporate approvals

Depending on the corporate form of the target (e.g. whether it is a non-public company, public unlisted company or listed company) and the nature of debt instruments (e.g. bonds or loans), the charter of the target would usually require the board and/or the shareholders/ members to pass some resolutions approving the swap and issuance of shares/capital.

Consents by other third parties

For example, change of control consents from banks, major suppliers or other contractual parties. Co-creditor consents may also be required, as another example.

Approvals by the licensing authority

In case of non-public companies, this typically includes (i) M&A approval, (ii) new enterprise registration certificate and (iii) new investment registration certificate (if applicable). If the target is a public company, approvals by the State Securities Commission and public disclosures to the stock exchanges would be required.

Merger filing

A merger filing may be required.

Alternative 1 – Restructuring or refinancing

If the challenges for a debt-into-equity swap as discussed above are simply insurmountable or if the value of the debt exceeds that of the equity to be exchanged for, the creditors may consider the following options (though they are somewhat less creative):

Extend-and-amend

- The debtor and creditor may enter into amended agreements to reflect an extended tenor and more affordable terms (e.g., reduced margin, deferred payment with cash sweeping etc.).

- For foreign loans with a term of more than 1 year, the changes to the terms that have been registered with the State Bank of Vietnam (SBV) must generally be registered again with the SBV. The creditor has to rely on the borrower to effect the registration.

- For bonds, although the bond regulations now provide for a clear legal basis for bond issuers to negotiate amendments/extensions with bondholders, for bonds issued prior to 16 September 2022 and are still outstanding, the tenor may be extended for not more than 2 years longer than the original tenor.

Assignment/transfer of debts to other parties:

The creditor can transfer/assign the debt (accompanied with related security interests) to another party. In most cases, finding a willing assignee/transferee is the most difficult task. The creditor may have to sell the debt at a significant discount. Such transfer would be subject to tax considerations.

- For foreign loans with a term of more than 1 year, again the borrower has to register the new lender with the SBV.

- For bonds, secondary transfers of bonds must be done on the central bond trading floor and done on a cash basis except for limited circumstances.

- Changes of the secured parties must be updated with the relevant security registrars and relevant third parties.

- The transferee/ assignee may ask for amendments of the existing transaction documents.

Refinancing:

Refinancing is a possibility, but high interest rates mean that it is not currently an easy option. Bringing in funds from new investors or current investors to repay debts is another possibility but the terms of any such investment are likely to be onerous. There are also certain regulatory hurdles, e.g.:

- Assuming the debt in question is a foreign loan, the debtor may obtain a new loan from another foreign creditor for refinancing provided that the principal of the new foreign loan does not exceed the outstanding principal, interests, fees of the existing foreign loan, and fees of the new foreign loan.

- Domestic banks generally cannot provide a loan to refinance existing foreign loans unless the new borrowing meets certain conditions, including (i) the term of the new domestic loan must not exceed the residual term of the existing foreign loan; and (ii) the repayment term of the existing foreign loan has not been restructured (i.e., not having been extended previously).

Alternative 2 - Enforcement of security

As a last resort, creditors would have no choice but to enforce the security granted to it. However, there are a number of practical hurdles that the creditor must keep in mind when taking this route:

- Vietnamese law recognizes the concept of self-help in enforcement of security. However, creditors, especially foreign creditors, are rarely able to unilaterally enforce the security without the cooperation of the security grantor;

- If a creditor has to initiate legal proceedings at a Vietnamese court or arbitration tribunal, the results of court and arbitral proceedings tend to be more unpredictable than in more developed jurisdictions;

- In case where a creditor may manage to get the Vietnamese debtor to agree on a foreign court or foreign arbitration tribunal as a dispute resolution body, the judgment or decision of a foreign court from most developed jurisdictions will not be recognised in Vietnam. The award or decision of a foreign arbitration tribunal are generally recognized in Vietnam but cannot be directly enforced so has to go through a discretionary recognition process in Vietnamese court;

- Even if a creditor did prevail in court or arbitration, it would have to rely on the provincial judgment enforcement body to enforce the judgement or award. So, even if the creditor wins the case, there is no guarantee that it will be able to enforce the judgement or award;

- The debtor or security grantor may have many other creditors who could try to prevent the enforcement process by initiating a legal action (e.g. by seeking an injunction);

- There may be many other challenges to be sorted out with other regulators, banks and counterparties. For example, even if the secured assets are listed shares, which are supposed to be liquid assets, enforcement of security over listed shares would require coordination with the SSC, the VSDC, the custodian/broker of listed shares and the relevant stock exchanges.