Handling bonded debt by real estate will speed up the settlement of bad debt

A reasonable price is an important issue for a successful negotiation with bondholders. Photo: Hoài Anh

Legal basis will accelerate the settlement of bad debts of corporate bond

Decree 08/2023/NĐ-CP dated March 5, 2023 amends and suspends some articles of decree prescribing private placement and trading of privately placed corporate bonds in the domestic market and offering of corporate bonds in the international market.

One of the most important points of Decree 08/2023/NĐ-CP is that in case of the offering of bonds in the domestic market where the issuer is unable to make full and timely payment of bond principal/interests in VND according to the issuance plan disclosed to investors, the issuer may reach an agreement with bondholders on payment of bond principal/interests using assets.

The payment must be made with the consent of bondholders; the issuer shall make ad hoc information disclosure and assume full responsibility for the legal status of assets used for paying bond principal/interests in accordance with legal regulations.

Regarding this issue, the Vietnam Association of Realtors said that, in recent times, many enterprises have chosen to restructure bond debt in the form of swapping into other assets such as real estate.

"If it is approved by investors, this is a way to resolve debts in the context of the corporate bond market being quiet, quite a lot of businesses have to "forgive" their bonds when they are due," the Vietnam Association of Realtors said.

The Hanoi Stock Exchange (HNX) has announced a list of issuers who have delayed payment of bond principal and interest during the period from September 16, 2022 to January 31, 2023. Accordingly, there are 54 enterprises that are late to pay bond principal and interest, including 34 enterprises operating the real estate-construction sector.

The report on the corporate bond market of Fiin Ratings also showed that, in the first two months of 2023, the real estate industry only recorded a successful batch of bonds issued by a real estate company.

Meanwhile, in 2023, the amount of bonds maturing is very large, about VND 205,000 billion, of which VND 104,000 billion of bonds matured from real estate companies.

Accordingly, the Vietnam Association of Realtors believed that the specific regulation of the principle of swapping bonds by real estate in the Decree will be the legal basis to promote the handling of bad debts of corporate bonds, helping bondholders to have more choices.

Accurate real estate pricing is a key problem

However, taking assets to repay bonds is not entirely in the hands of enterprises, enterprises also have to negotiate with bondholders. To successfully negotiate and convince the bondholder to agree, the enterprise needs to prove to the bondholder that owning the asset is attractive. If the bondholder does not approve, the enterprise will still have to manage to repay the debt in cash.

Therefore, the issuer needs to have a pricing level for bondholders to agree with a reasonable price is an important issue for a smooth and successful negotiation with bondholders in the context of thousands of bondholders having different demands and decisions. This showed that the accurate pricing of real estate to pay debt to bondholders will be a tough issue.

According to the Vietnam Association of Realtors, swapping bonded debts by real estate will create opportunities for creditors to actively choose and own houses at an agreed price. When accepting this price, the issuer will no longer have any debt obligations, but the bondholder will continue to face the risk of asset devaluation or legal problems related to the asset.

For example, the risk of co-owning real estate with other investors or having to spend more money to own separately due to the small investment amount; the risk of issuers pushing up real estate prices to clear the debt. Therefore, bondholders need to determine the price of swap real estate, negotiate fees when carrying out conversion procedures, especially learn about project legality.

Commenting on this new point, Dr. Nguyen Van Dinh, Chairman of the Vietnam Association of Realtors, said that the regulation that allows bond issuers to negotiate with bondholders to pay bond principal/ interest with other assets will help to remove bottlenecks for businesses at this time and open up opportunities for enterprises to have more options to handle the bond. However, a prerequisite is that there should be a negotiation between the enterprise and the bondholder.

Along with that, a number of regulations on bonds in Decree 08 will also help real estate businesses with bonded debt not to fall into a deadlock, opening up hope for them, giving them more time to restructure their debts, have an appropriate plan to restructure the product, have development opportunities, and benefit the market, investors and the economy in general.

Regarding the new points of this Decree, Fiin Ratings expected the current new policies, including Decree 08 on privately placed corporate bonds and Resolution 33 on removing difficulties for the real estate market recently issued by the Government will be the foundation for market participants to carry out debt restructuring activities as well as support investors to access new sources of credit when measures of legal issues of real estate are implemented.

According to data from Fiin Ratings, the total value of individual corporate bonds maturing in 2023 is estimated at VND 235 trillion. In particular, real estate businesses have bond balances that will mature at VND 100 trillion. The total outstanding balance of privately placed bonds maturing in the next two quarters stands at VND36.2 trillion in quarter 2 and VND35.4 trillion in quarter 3, respectively.