The long-awaited Decree No.65/2022/ND-CP issued last week on regulating private placement corporate bond issuance comes almost a year after the first draft was delayed.

Nguyen Hoang Duong, deputy director of the Banking and Financial Institutions Department under the Ministry of Finance (MoF) said, “We firmly believe several provisions would lay a concrete foundation to develop a transparent and sustainable corporate bond market to protect the interests of both issuers and investors, overcome inadequacies in the market recently, and minimise potential risks.”

SSI Securities stated that the decree permits a relatively accommodative set of issuance conditions for issuers, while also requiring issuers to undergo careful post-issuance assessment and information disclosure. At the same time, the definition of what constitutes a retail professional investor has been tightened, and additional regulations have been put into place in order to enhance transparency and legal compliance of bond-service providers.

“This legislative act shows the government does not wish to impose overly onerous restrictions upon corporate issuers – especially for real estate developers – and wants to provide a reasonably adequate funding channel mechanism through the bond market to help fulfil companies’ need for capital while helping to avoid potential default risks of enterprises during 2023-2025 – years in which there is a high amount of bonds that reach maturation,” SSI noted.

At the same time, supporting such a channel for funding via this revised corporate bond framework could be a more efficient medium for long-term funding of the economy in order to not depend too heavily on bank credit, the brokerage emphasised.

Market impact

According to data provider FiinGroup, Decree 65 is expected to enhance the standards of professional investors, boost information transparency, and protect investors’ interests. In addition to having a portfolio of at least VND2 billion ($84,000), professional investors need to maintain this figure on a 180-day moving average basis. These requirements will significantly affect the current structure of corporate bond investors.

“We highly appreciate the clauses related to voting rights and the approval rate of 65 per cent of the total outstanding bonds to help bondholders proactively capture information about businesses and projects they are investing in,” FiinGroup noted.

“Moreover, the new regulation relieves the market’s concern given that businesses are allowed to issue bonds for debt restructuring. We believe this is the right direction and in line with international practice. As the new decree requires compulsory credit rating for issuers, we believe this is appropriate and suitable regulation for the context of the Vietnamese market, as well as for effective and efficient market operations.”

Meanwhile, according to the MoF, the primary corporate bond market in the first seven months of this year attracted 46.1 per cent of investors from credit institutions, 22.4 per cent from securities companies, and 10.1 per cent from professional individual investors.

The secondary market data, nevertheless, reveals that the proportion of corporate bonds owned by retail investors has risen to 32.6 per cent, mostly as a result of transactions made via securities firms. Many securities companies in the market encourage non-specialist individual investors to buy a large number of corporate bonds as a savings product with a high rate of return.

Some experts anticipate that Decree 65 will make it easier for corporations to issue bonds and raise funds. Although many commercial banks’ credit limit has been expanded, it is still insufficient to meet the capital requirements, especially those in the real estate and energy sectors, which have medium and long-term capital requirements.

There is a lack of corporate bond issuance in these sectors, with some months seeing only one or two issuances across the industry. Decree 65 will provide a spur for qualified issuers to swiftly develop a bond offering strategy, the experts said.

Seeking new channels

Furthermore, the new decree could turn disjointed corporate bond trading into an organised and systematic trading market, from which the bond issuance process can be regulated from beginning to end. Centralising the depository at Vietnam Securities Depository and Clearing Corporation may also help better management of bonds, especially in defining professional investors and protecting their interests.

“Establishing a separate bond trading market will strengthen the distribution of corporate bonds, limit acts of rampant offering, and violate regulations. This is a viable option to improve the liquidity of the current market, as we estimate that there will be more than VND1.5 quadrillion ($63.2 billion) worth of outstanding corporate bonds put into the new system by the end of 2023. However, we forecast that the increase will not be too high because of the lack of demand due to stricter conditions in determining the status of professional investors,” FiinGroup said.

Unlike previous drafts, Decree 65 still allows businesses to issue corporate bonds for debt refinancing, but only for the business itself. This will reinforce the need for businesses to find other channels to refinance, particularly real estate firms that own many subsidiaries/affiliated companies to develop projects. The real estate industry alone accounted for 59 per cent of the total maturing bond value, and the pressure of maturing corporate bonds this year alone reached VND35.56 trillion ($1.54 billion) and will increase sharply to VND61.37 trillion ($2.67 billion) in 2023.

Accordingly, FiinGroup believed the approaching quarters will be tough for firms to manage cash flow in order to repay bond principal and interest because the corporate bond market has narrowed significantly since the beginning of the year.

Meeting upcoming debt obligations will be more difficult as the interest rate is expected to rise, increasing the burden of interest expenses on many businesses, especially those in capital-intensive sectors but facing difficulties in accessing credit, such as real estate.

For investors, although the conditions for determining individual professional investors have become more stringent than before, they are better protected when there is a better reporting mechanism and higher commitment responsibility by the enterprise, with voting rights on issues related to corporate bonds owned by them.

Non-professional investors are also compelled to purchase public offering bonds with certificates of registration for sale issued by the State Securities Commission or switch to purchasing fund certificates of investment funds. As a result, the purpose of purchasing corporate bonds is more rigorously regulated, causing the private placement market to shift not only in size but also in participant diversification among professional investors, insurance companies, bond funds, and voluntary pension funds, among others.

On the other hand, mandatory ratings, as per Decree 65, may assist decrease information asymmetry between issuers and retail investors, who are limited in financial knowledge, and self-analytical skills and are easily led by unorthodox information flow. Businesses with a solid financial status and legally qualified projects can raise money at a lower cost as the risk premium is reduced.

“This is not an attempt to rigorously restrict issuance conditions but helps the market operate more transparently and effectively,” said FiinGroup.

Source: VIR