New corporate bond decree only a temporary solution to market bottlenecks

A new decree on private corporate bond placements that aims to address urgent problems will not completely remove market bottlenecks, according to experts.

The government's Decree 08, effective from March 5, 2023, amends and supplements Decree 65, allowing issuers to extend their bond maturities by up to two years and pay principal and interest with assets other than cash.

The new decree also suspends the Decree 65 regulation on defining individuals' status as "professional securities investors". According to the old rule, in order to buy private placement corporate bonds, individual investors need to hold a securities portfolio, excluding margin loan value, worth at least VND2 billion ($84,300) in 180 days.

The old rule that required bond distribution time to not exceed 30 days since the announcement of the offering is no longer in effect, until December 31, 2023.

Most financial experts and securities companies said Decree 08 will have positive impacts on market sentiment, easing bond maturity pressure for issuers, especially real estate businesses in 2023-2024.

However, this is only considered a temporary solution that gives issuing companies more time to restructure. Their fate will depend greatly on the goodwill of bondholders and issuers.

Temporary solution

According to Nguyen Quang Thuan, chairman and CEO of FiinGroup, a leading Vietnamese financial data provider, corporate bonds worth more than VND300 trillion ($12.68 billion) will mature in 2023, most of which were issued by property firms. Up to 70% of 62 bond batches with late interest and principal payments are of real estate. However, with the current state of the realty market, the quality of these bonds is low.

Decree 08 is expected to help enterprises implement debt restructuring as it provides specific regulations that enable investors and businesses to negotiate bond debt payment extensions and postponement more quickly and drastically, depending on the specific situation of each investor and project, he said.

Especially, the decree mentions the refinancing of corporate bonds based on the legal status and feasibility of property projects as assets for payment as well as new terms including reasonable interest rates for both parties, he added.

Echoing Thuan, Huynh Minh Tuan, brokerage director at Mirae Asset Securities, said that the most important point of Decree 08 is to create conditions for issuers and bondholders to negotiate for bond debt payment rescheduling. This is the most positive regulation because currently, real estate businesses are facing liquidity problems.

The new decree enables bond issuers to have more time to restructure their debts; however, it will support bond issuers more than the bond market, he noted.

"Decree 08 is just a temporary solution because most of the assets of real estate firms remain in unfinished projects and inventories while there is no cash flow to absorb these assets. Since last year, credit for real estate has almost leveled off, and high interest rates have also made people afraid to borrow capital for investment," Tuan added.

Do Bao Ngoc, deputy general director of Vietnam Construction Securities (CSI), assessed that the new decree would positively affect the corporate bond market as it creates a legal framework to give issuers and bondholders more time and new options for negotiating principal and interest payments.

However, this decree only aims to solve urgent problems in the short term, but is not a solution to completely remove the bottlenecks of the corporate bond market or problems related to the financial situation of major issuers, including many property developers.

"To make Decree 08 really create positive changes, bond issuers must show their goodwill in negotiating with bondholders to achieve reasonable debt payment extension or asset swaps at market prices. In other words, the decree will really come to life only when the interests of bondholders are guaranteed," Ngoc said.

Mountain of work ahead

In the short term, Decree 08 is expected to help relieve the worries of businesses and investors. However, there are still many doubts about the actual impacts of the decree on the corporate bond market.

As the current interest rate difference between deposits and corporate bonds is not large, investors show less interest in this investment channel. Amid the almost exhausted market confidence, bank deposits are their top priority.

Despite the new decree, the fate of corporate bonds still depends greatly on the goodwill of investors and issuers. Some experts shared the common view that it is time for real estate developers to reduce product prices in a substantive way. When homebuyers see reasonable prices and no speculation, the market will gain liquidity.

At that time, bondholders will have enough confidence to convert corporate bonds into assets. This can be considered a fundamental issue and the meeting point between the issuer and the bondholder so that Decree 08 can prove effective and solve the root problems of real estate bonds.

Economic expert Can Van Luc said stakeholders must make preparations for next year when higher standards and conditions regarding professional investors, credit rating and bond distribution period are applied again.

Luc recommended businesses continue to sell their assets with discounts of up to 30-40%; promote product and operation restructuring, and reduce costs; and embark on new issuances under Decree 08 to have money to repay debts and complete unfinished projects.

They should diversify capital sources and pay more attention to financial risk management like limiting use of great financial leverage and scattered investment, he added.

According to Luc, the Ministry of Finance should consider solutions to encourage more public bond offerings, develop institutional investors, and establish a secondary bond trading center. It is necessary to promote the development of credit rating organizations, enhance financial knowledge education to improve the quality of investors, and propose amendments to the Securities Law and the Enterprise Law.

Credit rating organizations should proactively develop their capacity to provide ranking services, he added.