Corporate bonds

A draft decree aims to reduce the risks for investors in corporate bonds – Company law/commercial law

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After the issuance of Executive Order 153, MOF became aware of certain risks associated with non-compliance and/or high-risk financing via corporate bonds. The draft decree aims to reduce the risks for investors and to make the market more transparent. However, with the current project, Vietnamese companies may be negatively impacted.

On December 31, 2020, the Government of Vietnam issued Decree No. 153/2020/ND-CP (Executive Order 153), to regulate the private supply of corporate bonds for the local market and the supply of corporate bonds for the international market. Executive Order 153 comes into effect on January 1, 2021.

After the issuance of Executive Order 153 in 2021, the corporate bond market in Vietnam has grown rapidly. The Ministry of Finance (Ministry of Finance), when it has found non-compliance and/or high-risk financing via corporate bonds, has prepared a draft decree aimed at modifying certain provisions relating to the private offering of corporate bonds on the internal market in Decree 153 (Draft decree).

The intention is to further strengthen the regulations in Executive Order 153 with the aim of reducing risks for investors and making the market more transparent.

In this update, we will examine the main legal issues of the draft decree.

1. Purpose and entity using the amount collected

Under the draft decree, companies cannot issue bonds to provide capital in any way, acquire shares or bonds of other companies or lend to other companies. Furthermore, the capital raised during the issue of corporate bonds may only be used for the benefit of the issuing company, for the same purpose as indicated in the issue plan and in the information communicated to the investors.

This amendment to the draft decree, if passed, could negatively impact the ability of Vietnamese companies to raise funds for leveraged buyout transactions, making it more difficult for them to compete with their foreign counterparts. The Ministry of Finance is invited to reconsider this amendment for this reason.

2. Status of Professional Investor in Securities

The draft decree provides that before carrying out any purchase or sale of bonds, the investor must confirm his status as a professional investor in transferable securities.

Some are of the view that it is not necessary to confirm the status of professional securities investor before the sale of bonds, since the investor already owns the bonds and it is not necessary to limit investors’ right to sell.

3. Redemption of bonds

According to the draft decree, investors have the right to ask the issuer of the bonds to redeem the bonds before maturity if it is discovered that the issuer is using the money collected during the issue for other purposes. than those indicated in the bond issuance plan or the commitment to investors. .

The provision does not specify how discovered is determined, for example whether an investigation report from the competent public authority is necessary to confirm the issuer’s violation.

4. Credit rating requirements

In addition, the draft decree requires bond issuers to have credit rating results from credit rating agencies as part of the bond issuance documents offered to individualprofessional investors in securities, bonds issued without security or guarantee of payment, or bonds issued by an issuing company which has suffered operating losses accumulated during the year of issue or during the year former. Similarly, the draft decree only allows individual professional securities investors to purchase privately offered bonds with credit ratings. The exception is where purchases are lawfully made pursuant to an effective court or arbitration award or estate.

Some experts are of the opinion that the credit rating requirement deprives investors of their freedom of choice and is practically unsustainable in the near future, given the lack of credit rating agencies in the market.

5. Liability of the Representative of the Bondholders

The draft decree specifies that the representative of the bondholders is responsible for supervising the use of the capital raised during the issue of the bonds, receiving and managing the guarantee, supervising the execution of the commitments of the issuing company and exercise other responsibilities in securities regulation, as appropriate.

6. Closing

The intention of the draft decree is to reduce risks for investors and the financial system, as well as to give more transparency to the market for privately offered corporate bonds. However, if the draft decree is adopted without further modification, we believe that there could be an undesirable negative impact on the corporate bond market. Various public opinions must be taken into consideration to obtain a decree with a more balanced and practical approach to achieve the intended objective of better regulating the market.

Originally published February 23, 2022

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.