Government urges caution on corporate bond risks

According to SSI Securities Corporation, the value of corporate bonds issued in 2019 was VND280 trillion ($12.17 billion) – an on-year increase of 25 per cent from 2018.
1508p21 government urges caution on corporate bond risks
By Philip Ziter - Lawyer, Russin & Vecchi

With banks lowering interest rates, retail investors have shown increased appetite for corporate bonds, which offer rates ranging from 10.1 to 11.2 per cent for bonds, with maturities ranging from 12 months to five years. With rates between 1.8 and 4 percentage points higher than deposit interest rates offered by major banks, the appeal to investors is clear. Thus, there is a growing trend of companies moving from taking on bank credit to issuing private placements of bonds – with issuances often amounting to several times the equity of the businesses.

However, the rising interest in corporate bonds, particularly in the retail and real estate segments, has troubled authorities. After a number of companies issued bonds worth over 50-100 times their equity last year, the Ministry of Finance (MoF) issued several warnings to private investors, advising caution and pointing out that real risks exist when issuing companies face financial difficulties.

Corporate bond holders are creditors, and as such, are only entitled to the interest stipulated in the bond’s coupons (normally a fixed interest rate). Corporate bonds can pose a financial risk to the issuer, due to the recurring obligation to pay interest, even if the project is not profitable. Investors also face risks. In this light, the government has moved to tighten corporate bond issuance regulations.

Under the existing law, the issuance of corporate bonds has long been conditional. For example, if a company fails to pay the principal and interest on existing bonds or if it fails to pay debts due within the previous three years, it is restricted from issuing corporate bonds.

Government Decree No.81/2020/ND-CP, effective from September 1, on issuance of corporate bonds will seek to further limit risks associated with corporate bonds. Decree 81 will limit bond issuance through private placement to five times the issuing entity’s equity stated in the financial statements of the latest quarter preceding the issuance. Decree 81 also mandates a minimum of six months between bond issuances – that is, companies may only issue bonds six months after any previous issuance was completed. Furthermore, issuances must be completed within 90 days from the date of public issuance.

Bond transfers are to be limited to 100 times in the first year (transactions between professional securities firms, done under a court order, or via inheritance will not count toward this limit). These requirements are intended to limit the amount of money issuers may raise from investors via private placements. Corporate bonds issued on international markets will be exempt from these restrictions.

Most corporate bonds are issued by unlisted companies, with an average coupon rate of 10 per cent over the previous year, with some rates as high as 13 per cent. In 2019, real estate firms issued the largest share of bonds representing 37.2 per cent of issuance value, banks took second place with 22.8 per cent, and tourism/hospitality companies issued 16.6 per cent. As companies recover from the financial impacts of the COVID-19 pandemic, the issuance of corporate bonds is likely to continue rising as traditional credit growth slows.

Many businesses do not specify the purpose of their issuance. This lack of transparency poses risks to investors, and this risk of default is intensified when companies issue bonds with higher coupon rates, and in turn use the funds they receive through issuances to pay off bank debts or redeem earlier bonds that have reached maturity. In this regard, Decree 81 specifically expands the requirement to disclose the purpose of raising capital through bonds, requesting issuers to specify projects, activities, or business plans needing funds, and debts to be financed.

Decree 81 (in the bond documentation) also requires investors to make an explicit representation that they have adequate access to information disclosed by issuers and that they understand the investment risks.

Decree 81 is the result of a government initiative aimed at reducing the risks associated with the unfettered issuance of corporate bonds. Decree 81’s rules are expected to encourage more companies to instead utilise public issuances, which will greatly increase transparency and reduce investor risk.

In addition to Decree 81, from January 1, 2021, under the new Law on Securities and the Law on Enterprises, the private placement of bonds will be essentially limited to professional investors, with very few exceptions.

Source: VIR
www.vir.com.vn

Related News

The economic situation continues to trend positively

The economic situation continues to trend positively

VCN - At the regular Government press conference for July and the first 7 months of the year held on the afternoon of August 5, Minister and Head of the Government Office Tran Van Son said that the socio-economic situation in the past 7 months continued to trend positively.
Transparent and stable legislation is needed to develop renewable energy

Transparent and stable legislation is needed to develop renewable energy

VCN - Achieving net zero emissions by 2050 is a development goal that Vietnam has committed. This is mainly achieved through a strong energy transition and low-emission development. However, the transition to clean energy is not easy for Vietnam because building a clean energy supply system requires large investments. In addition, technology in the production and storage of renewable energy is still limited, making it difficult to ensure a stable energy supply.
The Government plans to borrow maximum of VND676,057 billion and repay debt of VND453,990 billion in 2024

The Government plans to borrow maximum of VND676,057 billion and repay debt of VND453,990 billion in 2024

VCN – The Loan and Public debt payment plan in 2024 and the 3-year public debt management program for 2024 - 2026 have been approved by Deputy Prime Minister Le Minh Khai in Decision No. 260/QD-TTg.
Personal Income Tax Law to be amended in 2025

Personal Income Tax Law to be amended in 2025

VCN - On March 29, answering questions from the press at the Ministry of Finance's regular press conference for the first quarter of 2024, the leader of the Department of Management and Supervision of Tax, Charges and Fees Policy (Ministry of Finance) said, continue to focus on drastically implementing solutions to support businesses that the National Assembly and the National Assembly Standing Committee have approved; At the same time, closely monitor the situation to research and advise competent authorities on appropriate solutions.

Latest News

Continue to handle cross-ownership in banks

Continue to handle cross-ownership in banks

VCN - The situation of excess share ownership, cross-ownership between credit institutions (CIs), CIs and enterprises, although has decreased significantly compared to previous periods, is still complicated and requires continued inspection and control.
Striving for average CPI not to exceed 4%

Striving for average CPI not to exceed 4%

VCN - According to the report of the Ministry of Finance, there are still some factors that put pressure on price levels in the remaining months of 2024, so the Ministry has updated 2 scenarios of average inflation in 2024 increasing in the range of 3.7-3.92%.
Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

VCN - Discussing in groups about the project "1 law amending 7 laws" in the financial sector according to the program of the 8th Session on October 29, 2024, National Assembly delegates proposed that the Government should be assigned to make specific regulations on decentralization, granting the right to exempt and reduce taxes, and handling penalties for late payment of taxes...
Removing difficulties in public investment disbursement

Removing difficulties in public investment disbursement

VCN - According to the report of the Investment Department (Ministry of Finance), the estimated disbursement from the beginning of the year to October 31, 2024 is VND 355,616.1 billion, reaching 47.43% of the 2024 plan, reaching 52.29% of the plan assigned by the Prime Minister.

More News

State-owned commercial banking sector performs optimistic growth, but more capital in need

State-owned commercial banking sector performs optimistic growth, but more capital in need

VCN - According to the report sent to the National Assembly before the 8th Session of the Government on investment, management and use of state capital in enterprises nationwide in 2023, the business performance of the state-owned commercial banking sector achieved positive growth.
Stipulate implementation of centralized bilateral payments of the State Treasury at banks

Stipulate implementation of centralized bilateral payments of the State Treasury at banks

VCN - The Ministry of Finance (MOF) gathers feedback on the draft Circular regulating the management and use of accounts of the State Treasury opened at the State Bank of Vietnam (SBV) and commercial banks.
Rush to finalize draft decree on public asset restructuring

Rush to finalize draft decree on public asset restructuring

VCN - According to the Ministry of Finance, the draft Decree regulating the rearrangement and handling of public assets is being urgently completed by the Ministry of Finance to submit to the Government for promulgation.
Inspection report on gold trading activities being complied: SBV

Inspection report on gold trading activities being complied: SBV

The State Bank of Vietnam (SBV) has announced that inspections on compliance with legal policies in gold trading activities of credit institutions and gold trading businesses have been completed and an inspection report is being compiled.
Budget revenue in 2024 is estimated to exceed the estimate by 10.1%

Budget revenue in 2024 is estimated to exceed the estimate by 10.1%

VCN -The Government estimates that state budget revenue in 2024 will exceed VND 172.3 trillion, up 10.1% over the estimate, of which tax and fee revenue will reach 13.1% of GDP.
Ensure timely and effective management and use of public asset

Ensure timely and effective management and use of public asset

VCN – In order to promptly and effectively implement public asset management and use, ensuring compliance with legal regulations, the Ministry of Finance has just issued an official dispatch requesting ministries, branches and localities to comply with regulations in the Government’s Decree No. 114/2024/ND-CP dated September 15, 2024.
Accelerating decentralization in public asset management

Accelerating decentralization in public asset management

VCN - Amending the Law on Management and Use of Public Assets aims to improve regulations on accelerating decentralization and improving efficiency in management and use of public assets, and promoting financial resources, ensuring that the unified application the Law on Management and Use of Public Assets and other legal documents.
Difficulty in finding banks eligible to receive compulsory transfers

Difficulty in finding banks eligible to receive compulsory transfers

VCN - Reporting to the National Assembly, the State Bank of Vietnam (SBV) said that one of the difficulties in restructuring the credit institution system is the long process of finding and negotiating banks eligible to receive compulsory transfers.
Businesses can choose a suitable electronic invoice model generated from the cash register

Businesses can choose a suitable electronic invoice model generated from the cash register

VCN - The Ministry of Finance said that individual business households can choose a suitable model to apply electronic invoice solutions from cash registers, depending on the number of invoices used in the year, in the month and the current status of software solutions and technical infrastructure.
Read More

Your care

Latest Most read
Continue to handle cross-ownership in banks

Continue to handle cross-ownership in banks

VCN - The situation of excess share ownership, cross-ownership between credit institutions (CIs), CIs and enterprises, although has decreased significantly compared to previous periods, is still complicated and requires continued inspection and control.
Striving for average CPI not to exceed 4%

Striving for average CPI not to exceed 4%

VCN - According to the report of the Ministry of Finance, there are still some factors that put pressure on price levels in the remaining months of 2024, so the Ministry has updated 2 scenarios of average inflation in 2024 increasing in the range of 3.7-3
Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

National Assembly delegates proposed that the Government should be assigned to make specific regulations on decentralization, granting the right to exempt and reduce taxes, and handling penalties for late payment of taxes...
Removing difficulties in public investment disbursement

Removing difficulties in public investment disbursement

VCN - According to the report of the Investment Department (Ministry of Finance), the estimated disbursement from the beginning of the year to October 31, 2024 is VND 355,616.1 billion, reaching 47.43% of the 2024 plan, reaching 52.29% of the plan assigne
State-owned commercial banking sector performs optimistic growth, but more capital in need

State-owned commercial banking sector performs optimistic growth, but more capital in need

According to the report of the Government on investment, management and use of state capital in enterprises nationwide in 2023, the business performance of the state-owned commercial banking sector achieved positive growth.
Mobile Version