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.
Related News
Recurrent spending seriously controlled: Deputy PM and MoF Ho Duc Phoc
09:31 | 07/11/2024 Headlines
The economic situation continues to trend positively
11:36 | 07/08/2024 Headlines
Transparent and stable legislation is needed to develop renewable energy
13:45 | 01/08/2024 Import-Export
The Government plans to borrow maximum of VND676,057 billion and repay debt of VND453,990 billion in 2024
10:39 | 04/04/2024 Finance
Latest News
Monetary policy forecast unlikely to loosen further
15:51 | 22/11/2024 Finance
World Bank outlines path for Vietnam to reach high income status
13:44 | 22/11/2024 Finance
Strictly control public debt and ensure national financial security 2025
09:26 | 22/11/2024 Finance
Revising the title of a draft of 1 Law amending seven finance-related laws
14:33 | 21/11/2024 Finance
More News
Transparency evates the standing of listed companies
09:47 | 21/11/2024 Finance
State-owned securities company trails competitors
14:46 | 20/11/2024 Finance
Strengthening the financial “health” of state-owned enterprises
09:23 | 20/11/2024 Finance
U.S. Treasury continues to affirm Vietnam does not manipulate currency
13:46 | 19/11/2024 Finance
Exchange rate fluctuations bring huge profits to many banks
13:43 | 19/11/2024 Finance
A “picture” of bank profits in the first nine months of 2024
09:42 | 19/11/2024 Finance
Many challenges in restructuring public finance
10:02 | 18/11/2024 Finance
Tax declaration and payment by e-commerce platforms reduces declaration points and compliance costs
09:19 | 17/11/2024 Finance
Disbursement of public investment must be accelerated: Deputy PM
19:32 | 16/11/2024 Finance
Your care
Monetary policy forecast unlikely to loosen further
15:51 | 22/11/2024 Finance
World Bank outlines path for Vietnam to reach high income status
13:44 | 22/11/2024 Finance
Strictly control public debt and ensure national financial security 2025
09:26 | 22/11/2024 Finance
Revising the title of a draft of 1 Law amending seven finance-related laws
14:33 | 21/11/2024 Finance
Transparency evates the standing of listed companies
09:47 | 21/11/2024 Finance