Corporate bonds

New Requirements for Trading Privately Placed Corporate Bonds – Commentary

Introduction
Decree 153 and loopholes
Additional requirements for issuers
Additional requirements for investors
Creation of a private market for the exchange of corporate bonds on the stock exchange
comments

Introduction

On December 9, 2021, the government and the Ministry of Finance published for consultation the full text of the draft decree amending Decree 153/2020/ND-CP (Decree 153), which prescribes the private placement and trading of bonds of privately placed companies in the domestic market and offering corporate bonds in the international market. The consultation period is over. The draft decree aims to further strengthen the legal framework for a viable, transparent and efficient corporate bond market. However, in its current form, the draft decree could hamper corporate bond trading for both issuers and investors.

Decree 153 and loopholes

Since the implementation of Executive Order 153 on January 1, 2021, the private placement corporate bond market has shown signs of progress towards becoming a high quality corporate bond market. However, after a year of implementation, Decree 153 shows some shortcomings:

  • Bonds can be used for a variety of purposes – Executive Order 153 allows companies to issue bonds to provide capital and acquire shares or bonds of other companies. This allows small businesses with insufficient equity or businesses that have suffered a loss to raise a large sum of money. As a result, investors run the risk of holding bonds with low liquidity;
  • the increasing proportion of retail investors in the secondary market – Executive Order 153 requires investors in corporate bonds placed by individuals to be professional equity investors, but does not require such investors to maintain status at all times as a professional equity investor. As a result, individual investors exploit these loopholes to trade in the secondary market; and
  • a lack of guidance on trading on the stock exchange – under Executive Order 153, the Ministry of Finance is responsible for developing guidelines for the trading on the stock exchange of privately placed corporate bonds. However, after a year of implementing Decree 153, no circular is in place.

Additional requirements for issuers

Limited purpose of issuing corporate bonds
The draft decree adds restrictions to the purpose of issuing bonds. In particular, companies may not issue bonds to provide capital in any form, acquire shares or bonds of other companies or lend capital to other companies. In addition, the draft decree clarifies that investors have the right to ask the bond issuer to redeem the bonds before maturity if they discover that the issuer is using the money collected during the issue to purposes other than those set out in the bond issuance plan or commitments to investors. . This provision aims to strengthen the responsibilities of issuers in the use of bond proceeds for the intended purposes, as well as to prevent situations in which the parent company and the companies of the same group mobilize to mutually transfer capital.

This proposed revision receives little support from the general public and the organizations consulted because it is perceived as undermining the autonomy of companies in raising capital and discouraging the formation of multi-sectoral economic groupings. However, it is inevitably a tool for protecting investors. This amendment is also in line with the provisions of Article 4.8 and Article 7.2 of Circular 16/2021/TT-NHNN, which stipulate that credit institutions are not authorized to purchase corporate bonds when the purpose corporate bonds issued is to provide capital and/or buy shares in other companies.

Requirement for credit ratings
The draft decree provides that the credit rating result of a credit rating agency is a mandatory document included in the bond issue file in the event of:

  • bond issue:
    • individual investors;
    • without warranty; and
    • without guarantee of payment; and
  • issuers incurring a commercial loss.

The draft decree also limits individual investors to buying only rated private corporate bonds.

The obligation to use the results of credit ratings to assess the risks associated with bonds is similar to international practices and should improve the quality of the bonds issued, thereby reducing the risks for investors.

Additional requirements for investors

Both Executive Order 153 and the Draft Executive Order provide that professional equity investors are permitted to invest and trade in privately placed corporate bonds. The draft decree specifies that before proceeding with any purchase or sale of bonds, the investor must confirm his status as a professional investor in shares. This requirement is compatible with article 4 of decree 155/2020/ND-CP(1) and aims to prevent individuals from circumventing the law to become professional investors.

Creation of a private market for the exchange of corporate bonds on the stock exchange

While Executive Order 153 only stipulates that the Ministry of Finance shall provide guidelines for the exchange trading of privately placed corporate bonds, the draft Executive Order complements regulations on trading conditions, records and procedures. bonds on the stock market applied to public companies, and non-convertible bonds without warrants of non-public companies fulfilling certain conditions.

This amendment contributes to accelerating and standardizing the establishment of a market for the exchange of private company bonds on the stock exchange, and it strengthens the management and monitoring of the private company bonds put up for trading.

comments

The draft decree aims to create a more open and transparent private corporate bond trading market, as well as to reduce the risks for investors.

Rather than interfering too much with corporate affairs and investors’ negotiating rights, as the current draft does, the mechanism for monitoring issuer compliance and enhancing issuer engagement should focus on:

  • require issuers to make the prospectus available to investors;
  • detailing the responsibilities and obligations of company managers in the management and supervision of bond transactions;
  • describing the criteria for determining when bond proceeds are not used for their intended purpose; and
  • governing bondholder representatives (responsible for monitoring issuers’ compliance with their commitments) in a manner similar to Decree 155 (i.e. specifying the qualifications, appointment and responsibilities of bondholder representatives).

The draft decree is being finalized for submission to the Ministry of Justice for assessment and to the government for promulgation.

For more information on this subject, please contact Thanh Minh Vu or Nguyen Dieu Quynh at LNT & Partners by phone (+84 28 3821 2357) or email ([email protected] or [email protected]). The LNT & Partners website can be accessed at the address www.lntpartners.com.

Endnotes

(1) Decree 155/2020/ND-CP establishing certain articles of the securities law.