The Vietnamese corporate bond market has become an effective channel for raising funds. The rules for marketing corporate bonds have developed and the market has reacted.
The rules on the private placement of corporate bonds issued in 2006 was an important step. For the first time, Vietnam had detailed rules on issuing corporate bonds. Previously, public company bonds monopolized the market.
Several decrees followed. Executive Order 153 which took effect on January 1, 2021 extended the framework for the private placement of corporate bonds and created a robust framework to regulate transactions involving corporate bonds. In addition, the Securities Act 2019 and its implementing decree 155 regulated the public offering of securities, including corporate bonds. Although there is room for improvement, particularly with regard to market transparency and the protection of investors in the secondary market, this relatively new legal framework is now reasonably complete. It gives companies better access to public capital and has strengthened the development of Vietnam’s capital markets.
A corporate bond is defined as a type of security with a term of one year or more issued by a limited liability company or a corporation. The law defines the legal rights and interests of the bondholder.
Convertible bonds are conventional bonds, but with the added feature that they can be converted into common stock if the issuer is a corporation. Under Executive Order 153, only a joint-stock company can privately place convertible bonds, i.e. equity-linked bonds. The terms and conditions of the conversion – for example, the timing and the conversion ratio – are defined in the bond issuance plan.
But an issuer can simply indicate that the bonds will be converted into shares at the market price (under certain conditions, for example after a certain date).
A limited liability company or a corporation can issue non-convertible bonds.
An issuer may secure its obligations by its own property or that of a third party or by an acceptable guarantee of payment from a third party. That is to say, Decree 153 no longer requires that payment guarantees be provided by a financial or credit institution.
Additionally, a joint-stock company may issue warrants with its convertible or non-convertible bonds. Warrants give the holder of a bond the option to purchase a certain number of common shares on the terms specified in the terms of issue of the bond. A limited liability company cannot issue warrants to its bondholders.
Executive Order 153 imposes certain restrictions on a purchaser of corporate bonds. Only defined professional securities investors are permitted to purchase non-convertible bonds. Convertible bonds and bonds with warrants may only be issued for the benefit of professional securities investors and strategic investors, and the number of strategic investors must be less than one hundred.
Under Executive Order 153, the conditions for issuing bonds depend on the type of bond. Briefly, the conditions an issuer must meet to issue corporate bonds include:
- Have fully paid the principal and interest of all bonds previously issued or have fully paid its debts when due within the three years immediately preceding the issue; there is an exception if the bonds are offered to selected financial institutions;
- Satisfy prudential and other financial ratios that ensure operational security;
- Have an issue plan (containing the information required by article 13.1 of decree 153) that has been approved by the issuer;
- Have audited financial statements for the year immediately preceding the year of issue, which statements meet the conditions of Executive Order 153.
The issuance of bonds in foreign markets is, of course, subject to the regulations of that market. In addition, the approval of the State Securities Commission (if the issuer is a public company) and the State Bank of Vietnam is required for the issuance of corporate bonds in the markets. strangers. No similar approval is required for the private placement of bonds in Vietnam.
A company can itself determine the interest rate of the bonds it issues, taking into account its reputation, its investment project and the market situation. Interest rates can be fixed throughout the term of the bond or floating. If the interest rates are floating, the issuer must announce the interest rate that it will use as a reference in order to determine the rate actually paid.
Decree 153 provides broad and transparent rules for a company to place bonds. A private placement of bonds may be made using one of the following methods:
A company can engage an underwriter to make a private placement with either a firm commitment, a stand-by agreement, or a commitment of means. In the first case, the subscriber acts as principal and takes the risk of placing bonds with investors. If the subscriber is unable to find investors, he will take the bonds himself. In the second case, the company carries out the private placement itself and the subscriber undertakes to buy the remaining bonds,
A company may choose a securities firm or other financial institution approved by the State Securities Committee to provide underwriting services.
Bonds can also be issued by auction.
A bond auction can be conducted by the issuer itself. It can also be done through an intermediary financial institution or through the stock exchange.
A company may engage an agent (whether a securities firm, commercial bank or duly licensed financial institution) to distribute its bonds.
Only credit institutions are authorized to issue their bonds directly to buyers.
A public offering of corporate bonds must take one of the following forms:
- sale of bonds through the mass media;
- sell them to at least 100 investors, excluding professional investors and excluding current investors in this company; or
- sell bonds to an indefinite number of investors.
To issue bonds to the public, a company must have paid up at least 30 billion VND (about 13,000,000 USD) of its share capital. It must also have been profitable the previous year and not have accumulated losses or outstanding debts for more than a year. There must be feasible plans for using and reimbursing the product. All information should be made available to the public through a strong prospectus. The issuer must open an escrow account to receive payment and must engage a securities firm to advise on the registration of the public offering. In addition, the issuer must undertake to list the bonds on the stock exchange after the closing of the offer.
The public offering of convertible bonds must satisfy many of the same requirements that apply to the public offering of shares by a public company. The issuer must perform its commitments and obligations and must undertake to recognize the rights of bondholders and, of course, to repay at maturity.
Similar to the private placement of corporate bonds, a bond issuer is not required to offer its bonds to the public through an intermediary agency. It is also not necessary to have a subscriber.
Stock Exchange listing
Corporate bonds offered to the public must be listed on a stock exchange after the closing of the offer. Circular 57 undertakes that no later than December 31, 2022, the Hanoi Stock Exchange will be the only stock exchange on which corporate bonds may be listed.
Unlisted corporate bonds
Vietnam has developed a comprehensive legal framework for issuing and marketing corporate bonds. But unlisted corporate bonds can only be traded between professional investors. Under Circular 57, the Hanoi Stock Exchange will be responsible for arranging transactions in unlisted corporate bonds. However, as transactions in unlisted bonds are not yet regulated, they are inherently risky. The recognition of an over-the-counter market and the expected promulgation of detailed rules for transactions in unlisted bonds should provide a basic framework for these riskier instruments.
It is undeniable that the legal framework for the marketing of corporate bonds has recently been strengthened. However, there remain loopholes that expose investors, for example, the lack of a mechanism to monitor the actual use by the issuer of the product as committed and the lack of appropriate credit ratings of bond issuers. In addition, the secondary bond market is still in its infancy and there is no detailed regulation or supervision in this market yet.
The government’s efforts to complement corporate bond regulations are aimed at encouraging companies to raise public funds to invest in business and production, rather than forcing companies to resort to the more traditional method of borrowing from banks. This development and an appropriate legal framework are steps towards imposing international standards on Vietnam’s capital markets. Stricter rules must be adopted – for example, mandatory professional credit ratings for bond issuers and stricter rules to control the secondary bond market. But it is inevitable that trading in corporate bonds will accelerate and be seen as an integral part of a global financial market.
This article appeared on Mondaq on May 13, 2022.