New decree expected to remove bond market bottlenecks: top broker

A new decree on private placements of corporate bonds will create a necessary legal corridor to deal with current bottlenecks in the market, according to VNDirect Securities.

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 needed to hold a securities portfolio, excluding margin loan value, worth at least VND2 billion ($84,300) for 180 days.

In a recent report, VNDirect said that Decree 08 will create a legal basis for issuers to negotiate adjustments to some terms related to corporate bonds, including the extension of their bond maturities.

Firstly, as businesses, especially real estate developers, are facing difficulties in cash flow and liquidity, the debt rescheduling will give them enough time to collect money to fulfill their repayment obligations.

Secondly, the decree allows issuers to pay bond principal and interest with other legal assets, making debt repayments more flexible. This should give real estate businesses the motivation to accelerate unfinished projects and sell them at reasonable prices acceptable to bondholders.

However, reaching agreements between bondholders and issuers will depend on specific terms, including the legality and valuation of the assets that the businesses offer to swap. On the other hand, enterprises will have to accept a higher future cost to solve the immediate bond maturity problem," VNDirect noted.

Thirdly, Decree 08 will help increase the rate of successful corporate bond issuances through delaying the implementation of regulations on “professional securities investors” and increasing bond distribution time.

This will help more investors qualify to become professional, thereby increasing the demand for bonds. However, investors have lost confidence, so it will also need time to stabilize market sentiment.

Fourthly, extending the mandatory credit rating to January 1, 2024 will help increase businesses’ access to capital through private bond placements.

In the report, VNDirect estimated the maturity value of corporate bonds this year at nearly VND252 trillion ($10.63 billion), a year-on-year increase of 64%. This includes VND160 trillion ($6.75 billion) in the second and third quarters. Real estate businesses account for the largest proportion with 43% of the total maturity value, or VND 107.7 trillion ($4.54 billion).

"In the context of the quiet property market, many businesses face difficulties in cash flow and limited access to capital. The number of issuers with late bond debt repayments is increasing, counting 46 by March 5, 2023 as announced by the Hanoi Stock Exchange (HNX)," the report stated.

VNDirect estimated that real estate companies’ total outstanding bond debt at about VND121.1 trillion ($5.1 billion), accounting for nearly 12% of the whole market. About VND38.5 trillion ($1.62 billion) worth of corporate bonds of listed companies will mature in 2023, making up 15% of the total maturity value of the whole market.

For the corporate bond market to recover, it will need more drastic solutions from businesses to strengthen investor confidence. Real estate developers must restructure their products to meet the real needs of the market, and take measures to sell inventories to solve current difficulties in cash flow. In addition, state management agencies should speed up the settlement of legal procedures for property projects.

It is necessary to support businesses in accessing capital sources, especially credit, to solve the short-term liquidity problem, similar to what China and South Korea have done to deal with their corporate bond crises, VNDirect said.

"The market is waiting for more positive signals from these solutions," it added.

The local corporate bond market experienced a hot growth period in 2020 and 2021, with issuance values of nearly VND462 trillion ($19.47 billion) and VND658 trillion ($27.73 billion), respectively, according to Vietnam Bond Market Association (VBMA) data.

The growth of this fundraising channel was driven by the surging demand of companies for capital, especially real estate developers and banks, and demand for yields higher than bank deposit rates.

However, after arrests related to violations in bond issuance and improper use of proceeds by several major real estate developers in the middle of last year, the bond market came to a sudden halt.

The issuance volume in 2022 was only VND255 trillion ($10.75 billion). In January this year, the market only had one successful issuance worth VND110 billion ($4.64 million).