Tightened regulations threaten businesses with bond market exit

The Ministry of Finance has proposed a decree amendment to strictly tighten conditions for corporate bond issuance, especially through private placement.

Under the draft, enterprises are not allowed to issue bonds for investment in forms of capital contribution, share purchase, purchase of capital contribution, and purchase of other enterprises' bonds, or for lending to other enterprises. The move aims to limit capital transfers between businesses, according to the ministry.

This is expected to challenge business groups like BRG, TNR, Vingroup, and Novaland, as the parent company cannot issue corporate bonds to fund its subsidiaries.

Moreover, the total outstanding bond loan at the time of issuance, including the planned volume of issuance, must be limited to less than three times the company's equity as shown in its most recent quarterly financial statement.

Companies must also prove their production and business activities in the previous year make profit and no accumulated losses. This is a big hindrance to newly-established companies as they normally make losses in their first few years. It might also discourage them to venture into new business fields.

The draft regulates that individual investors are only allowed to purchase corporate bonds issued throught private replacement by public companies that must have collateral or payment guarantees.

Experts believed that the proposal would reduce market liquidity, tighten purchasing power, and make it difficult for businesses to raise capital.

There is no guarantee that public companies would repay their obligations better than non-public companies. Tan Hoang Minh's "debt bomb" demonstrated that dealing with collateral is extremely tough and complicated. Besides, payment guarantees are only available through banks. However, banks are unwilling to incur risks to underwrite payments for corporate bonds.

Analysts were also concerned about the requirement that professional investors need to make a VND2 billion ($87,094) investment and maintain it for two years in a row.

They said only large shareholders and founder shareholders of listed enterprises could meet the regulation. As investors, who only perceive the stock market as a means to earn money, might withdraw funds when the market falls. Therefore, the necessity of maintaining investments for two years in a row is quite challenging.

Many businesses were concerned that the proposed amendements would choke the market on both supply and demand sides, pushing many to abandon the bond game and possibly threatening a chain default if capital flows are abruptly halted.

The ministry has not yet found a neutral point to both protect investors and promote the corporate bond market, analysts said.

They believed that instead of tightening the conditions for issuing corporate bonds and collateral, the regulator should focus on information transparency solutions, supporting the development of bond investment funds, and improving professionalism among individual investors. Credit rating was highly recommended as an important indicator to help investors make bond investment decisions.

According to Nguyen Tung Anh, senior credit risk researcher at FiinRatings, it is unacceptable to impose harsh restrictions that restrain firms' financial resources. Not every loss is awful, many organizations and projects are in the early stages of loss, but with positive cash flow and ability to pay debts, as well as excellent financial health, good credit, and goodwill to repay loans, he argued.

According to FiinRatings, a financial data provider, corporate bond issuance in the first four months reached VND76 trillion ($3.28 billion), down 19 percent year-on-year, accounting for 11.47 percent of the total issuance value. Of this, the first quarter accounted for VND65 trillion ($2.83 billion).

The real estate sector maintained the lion's share of the issuance structure, reaching VND28.8 trillion. Corporate bonds currently act as an essential medium and long-term capital mobilization channel for Vietnamese real estate enterprises.