New decree to help corporate bond market avoid short-term collapse: lawyer

The government's newly-issued Decree 08 on private corporate bond placements would help the Vietnamese corporate bond market avoid a short-term collapse by extending the repayment period and increasing demand for bonds, wrote lawyer Nguyen Thanh Ha, chairman of SB Law.

What is your overall assessment of Decree 08 on corporate bond private placements, effective from March 5?

On March 5, 2023, the government issued Decree No. 08/2023/ND-CP amending, supplementing and suspending the effect of a number of articles in the previous decrees, which regulate the private placements and trading of corporate bonds in the international and domestic markets.

Decree 08 has almost completely removed entanglemets of Decree 65/2022/ND-CP that cause some practical difficulties for businesses and investors to buy bonds, and hit on the hottest and most festering issues, paving the way for domestic enterprises to recover from recent "turbulences".

The new decree would help the corporate bond market avoid short-term collapse by reducing the supply of bonds, extending the repayment period and increasing the demand for bonds.

The government has made great efforts in "troubleshooting" the corporate bond market. We hope that businesses could take advantage of this policy and firmly overcome this difficult period.

Decree 08 includes the regulation on paying the principal and interest of bonds with assets other than cash. Many people believe that this rule creates a bad precedent as it makes businesses feel that if they cannot pay bondholders in cash, they can pay with other assets like property from inventories. What are your views on the positive and negative points of this regulation?

The regulation on being able to pay bond principal and interest with other assets is only a temporary solution to "rescue" businesses. We can see that such a regulation, in addition to positive effects, always has negative impacts.

Positive impacts

Specifically, according to Clause 3, Article 34 of the government's Decree No. 153/2020/ND-CP, providing for the private placements and trading of corporate bonds in the international and domestic markets, the bond issuer has the responsibility to: "Pay in full and on time the bond’s interest and principal upon maturity and exercise the attached rights (if any) to the bondholder according to the bond’s terms and conditions."

Decree 08 amends and supplements this regulation as follows: For bonds offered for sale in the domestic market, in case the issuing enterprise is unable to pay in full and on time the bond’s principal and interest in Vietnamese dong according to the issuance plan announced to investors as stipulated in Article 17 of this decree, enterprises may negotiate with the bondholder to pay bond principals and interests due with other assets according to the following principles:

First, comply with the provisions of civil and relevant laws. For conditional business and investment lines, they must also comply with the provisions of laws on such conditional investment and business lines.

Second, it must be approved by the bondholder.

Third, the issuing enterprise must disclose unusual information and take full responsibility for the legal status of assets used to pay bond principal and interest in accordance with the law.

Thus, the state stipulates that the principal and interest of bonds can be paid with other assets, but there will be control conditions attached, with the issuing enterprise to comply with the provisions of civil and relevant laws while the payment must be approved by the bondholder.

We see here that the problem is still to uphold the agreement between the enterprise and bondholders. If these investors do not agree, the enterprise is still forced to pay according to the previous agreement.

The regulation on being able to pay the bond’s principal and interest with other assets will help the corporate bond market ease the pressure of debt repayment, reduce the supply of bonds in the market, and thereby reduce the pressure on debt repayment and boost the probability of selling off corporate bonds.

Negative impacts

In addition to helping enterprises loosen the repayment period, the regulation on being able to pay bond principal and interest with other assets also poses risks for bondholders because payment by these other assets need to be regulated more transparently and clearly for each type of bond, while it is also necessary to clearly stipulate the payment time, the form of conversion from bonds to assets, etc. Only then can it be implemented in practice.

As for worries, this creates a bad precedent when businesses assume that if they cannot pay bondholders in cash, they can pay with other assets. This is not worrisome, because we see, with seriously operating businesses, at this stage they have difficulty because they are stuck in cash flow. It is not that the business has no money or does something illegal. At the same time, they have difficulty in managing their money, if enterprises are forced to pay, they may go bankrupt because they do not meet the bond payment criteria. This is a key factor in debt relief for bond issuers and enterprises that do not want this problem.

And it is impossible for enterprise to assume that when they cannot pay bondholders in cash, they can pay with other assets because it would be difficult for the enterprise to get approval from bondholders.

Under the new decree, the issuer can extend the bond term by up to two years. Is it enough for bond issuers to restructure and arrange money to pay bondholders this year and the next?

Point b, Clause 3, Article 3 of Decree No. 65/2022/ND-CP dated September 16, 2022 amending and supplementing a number of articles of Decree No. 153/2020/ND-CP stipulates that enterprises cannot change the maturity of issued bonds. The above provisions have been amended by Decree 08 in the direction of allowing enterprises to change the conditions and terms of bonds while ensuring the following principles:

Firstly, comply with the provisions of Clause 3, Article 1 of this decree.

Secondly, in case of extending the bond's term, the maximum additional time is not more than two years compared to the term in the bond issuance plan announced to investors.

Thirdly, for bondholders who do not agree to change the bond's terms and conditions, the issuing enterprise is responsible for negotiating to ensure the interests of investors. If a bondholder does not accept the negotiated plan, the enterprise must fulfill all obligations towards the bondholder according to the bond issuance plan announced to investors (including the case in which the change in terms and conditions of bonds has been approved by bondholders representing 65% or more of the total number of bonds).

Enterprises can extend the payment period of bond principal and interest for another two years. Bonds due in 2023 are about VND53 trillion ($2.24 billion), of which, in the first six months of the year total about VND30 trillion. Thus, if the enterprise has difficulties in cash flow, it can negotiate with the bondholder for an extension of two years in order to gradually arrange the source of money to pay the bondholder.

I think that it is reasonable for businesses to extend the bond repayment term to avoid a temporary collapse in the corporate bond segment.

However, if the business does not perform well, it will be difficult to restore trust and repay the debt because the period of two years is not too long, which requires the enterprise to focus on business planning. If not in the following years, the pressure to repay bonds will continue to grow.