Background
Vietnam's corporate bond market has become an effective channel to mobilise funds. The rules to market corporate bonds have developed and the market has responded.
The rules1 on private placement of corporate bonds issued in 2006 were a milestone. For the first time, Vietnam had detailed rules on issuing corporate bonds. Previously, state-owned companies' bonds monopolized the market.
Several decrees followed2. Decree 1533 which took effect on January 1, 2021 extended the framework for the private placement of corporate bonds, and it created a solid framework to regulate transactions involving corporate bonds. In addition, the Law on Securities 2019, and its implementing Decree 1554 regulated the public offering of securities including corporate bonds. Even though there is scope for improvement--especially relating to the transparency of the market and protection of investors on the secondary market--this relatively new legal framework is now reasonably complete. It gives businesses better access to public capital, and it has deepened the development of Vietnam's capital markets.
Corporate bonds
A corporate bond is defined as a type of security with a term of one year or more issued by either a limited liability company or a joint stock company. The law defines the legal rights and interests of the bondholder.
Convertible bonds
Convertible bonds are conventional bonds, but with the added feature that they may be converted to common shares if the issuer is a joint stock company. Under Decree 153, only a joint stock company may privately place convertible bonds--ie, bonds connected to shares. Terms and conditions of the conversion-- eg, time and ratio for conversion--are set out in the bond issuance plan.
But an issuer may simply state that the bonds will be converted into shares at market price (under certain conditions, eg, after a certain date).
Non-convertible bonds
Either a limited liability company or a joint stock company can issue nonconvertible bonds.
An issuer may secure its bonds by its own properties or those of a third party or by an acceptable third-party guarantee of payment. That is, Decree 153 no longer requires payment guarantees to be made by a financial or credit institution.
In addition, a joint stock company may issue warrants together with its convertible or non-convertible bonds. Warrants give a bond holder the option to purchase a number of common shares on conditions specified in the bond issuance terms. A limited liability company cannot issue warrants to its bond holders.
Private placement
Decree 153 places some restrictions on a purchaser of corporate bonds. Only defined professional securities investors are allowed to buy non-convertible bonds. Convertible bonds and bonds with warrants attached can only be issued to professional securities investors and strategic investors, and the number of strategic investors must be fewer than one hundred.
Under Decree 153, the conditions to issue bonds depend on the type of bond. Briefly, the conditions that an issuer needs to satisfy in order to issue corporate bonds include:
- Having fully paid principal and interest on all bonds previously issued or having fully paid its debts when due during the three years immediately preceding the issue; there is an exception if the bonds are offered to selected financial institutions;
- Satisfying financial prudential and other ratios which ensure operational safety;
- Having an issuance plan (containing information required by Article 13.1 of Decree 153) which has been approved by the issuer;
- Having audited financial statements for the year immediately preceding the year of the issue, which statements satisfy the conditions of Decree 153.
Issuance of bonds on overseas markets is, of course, subject to the regulations of that market. In addition, approval by the State Securities Commission (in case the issuer is a public company) and by the State Bank of Vietnam are required for issuance of corporate bonds in overseas markets. No similar approval is required in the private placement of bonds in Vietnam.
A company may itself determine the interest rate on the bonds it issues, taking into account its reputation, its investment project, and the market situation. Interest rates may be fixed for the whole term of the bond or may be floating. If interest rates are floating, the issuer must announce the interest rate it will use as a reference in order to determine the actual rate paid.
Decree 153 provides broad and transparent rules for a company to place bonds. A private placement of bonds can be made by any of the following modes:
Underwriting
A company may engage an underwriter to conduct a private placement with either a firm commitment, a standby agreement, or a commitment to best endeavours. In the first case, the underwriter acts as principal and takes the risk of placing bonds with investors. If the underwriter is unable to find investors, it will take the bonds itself. In the second case, the company itself conducts the private placement and the underwriter agrees to purchase any bonds that remain,
A company can choose a securities company or another financial institution licensed by the State Securities Committee to provide underwriting services.
Tendering
Bonds may also be issued by auction.
A bond auction can be conducted by the issuer itself. It may also be made through a financial intermediary institution, or it may be made through the stock exchange.
Agent
A company may engage an agent (being a securities company, a commercial bank or an appropriately licensed financial institution to distribute its bonds.
Direct sale
Only credit institutions are permitted to issue their bonds directly to buyers.
Public offering
A public offering of corporate bonds must take one of the following forms:
- selling bonds through mass media;
- selling them to at least 100 investors, excluding professional investors and excluding current investors of that company; or
- selling bonds to an indefinite number of investors.
To issue bonds to the public a company must have paid in at least VND 30 billion (approximately US$13,000,000) of its charter capital. It must also have been profitable in the preceding year and must not have accumulated losses nor debt overdue for more than one year. There must be feasible plans to use and repay the proceeds. All information must be available to the public through a robust prospectus. The issuer must open an escrow account to receive payment and must engage a securities company which will advise on registration the of public offering. In addition, the issuer must commit to list the bonds on the stock exchange after the offering is complete.
The public offer of convertible bonds must satisfy many of the same requirements that apply to the public offer of shares by a public company. The issuer must perform its commitments and obligations and must commit to recognize the rights of the bondholders and, of course, to repay when due.
Similar to private placement of corporate bonds, a bond issuer is not required to offer its bonds to the public through an intermediary agency. Neither is it required to have an underwriter.
Listing on the stock exchanges
Corporate bonds publicly offered are required to be listed on the stock exchange after the offering is completed. Circular 575 undertakes that on December 31, 2022, at the latest, the Hanoi Sock Exchange will be the only stock exchange on which corporate bonds may be listed.
Unlisted corporate bonds
Vietnam has developed a comprehensive legal framework to issue and market corporate bonds. But unlisted corporate bonds can only be transacted among professional investors. Under Circular 57, the Hanoi Stock Exchange will be responsible to organize transactions involving unlisted corporate bonds. However, as transactions involving unlisted bonds are not yet regulated, they are inherently risky. Recognition of an over-the-counter market and the expected promulgation of detailed rules for transactions involving unlisted bonds should provide a basic framework for these more risky instruments.
Investors Protection
It is undeniable that the legal framework for marketing corporate bonds has recently been enhanced. However, there remain gaps that expose investors, eg, lack of a mechanism to monitor the issuer's actual use of proceeds as committed and the lack of proper bond issuers' credit ratings. In addition, the secondary bond market is still in its infancy, and as yet there are no detailed regulations or controls on this market.
Conclusion
The Government's efforts to complete regulations on corporate bonds is aimed at encouraging companies to mobilise funds from the public for investment in business and production, rather than forcing companies to rely on the more traditional way of borrowing from banks. This development and an appropriate legal framework are steps toward imposing international standards on Vietnam's capital markets. Stricter rules need to be adopted--eg, compulsory professional credit ratings for bond issuers and more strict rules to control the secondary bond market. But it is inevitable that the trading of corporate bonds will accelerate and will be seen as a normal part of a comprehensive financial market.
Footnotes
1. Decree 52/2006/ND-CP dated May 29, 2006 ("Decree 52")
2. Decree 90/2011/ND-CP, Decree 163/2018/NĐ-CP (amended by Decree 81/2020/ND-CP)
3. Decree 153/2020/ND-CP dated December 31, 2020 ("Decree 153")
4. Decree 155/2020/ND-CP dated December 31, 2020 ("Decree 155")
5. Circular 57/2021/TT-BTC dated July 12, 2021 ("Circular 57")
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
