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Official Gazette

Friday, May 27, 2022

Fixing legal loopholes to develop a sound corporate bond market

Updated: 09:00’ - 12/05/2022
In early April, the domestic financial market wobbled as the State Securities Commission announced its decision to cancel nine issuances of corporate bonds by three companies under Tan Hoang Minh Group during the period from July 2021 to March 2022, with a total value exceeding VND 10 trillion (nearly USD 439 million), for disclosing false information and concealing information.
 
Later, the Chairman of Tan Hoang Minh Group and six other people were arrested on suspicion of “appropriating property through swindling” concerning the above-mentioned sales of bonds.
 
The unprecedented case of Tan Hoang Minh can be considered the alert sent from state management agencies to both bond issuers and investors in the domestic corporate bond market.

A conference titled “Sustainably developing the corporate bond market” in Hanoi on April 19__Photo: https://nld.com.vn/
 
An overheated but potential market
 
According to a report presented by the National Assembly (NA)’s Economic Committee at a meeting of the NA Standing Committee in late April, the total value of private placements and public offerings of corporate bonds in the first half of 2021 amounted to VND 176,828 billion and VND 15,375 billion, respectively, up by more than 8 percent and 53 percent over the same period of 2020. 
 
As per data of the Ministry of Finance (MOF), the total value of private placements of corporate bonds in 2021 was VND 605 trillion, an increase of nearly 39 percent compared to 2020’s figure, while bonds issued to the public were valued at VND 31 trillion. In 2021, the corporate bond market’s size approximated to 16.6 percent of GDP, an impressive rise from the figure of 4.9 percent in 2017.
 
The latest statistics of the Vietnam Bond Market Association show that in the first quarter this year, there were 57 corporate bond issuances, including 48 private placements with a total value of about VND 30,998 billion, accounting for 78.09 percent of the total issuance value, and nine public offerings valued at VND 8,696 billion, making up 21.91 percent. The total value of public offerings increased by nearly 14 percent over the same period last year while the value of private placements decreased by more than 24 percent. The group of real estate businesses is taking the top position in issuance value that reaches VND 17,211 billion, accounting for more than 43 percent, in which bonds with a term of between one year and three years were valued at over VND 10 trillion, equivalent to roughly 58 percent. The construction group ranks second with VND 8,280 billion, making up 20.86 percent of the total issuance value.
 
The corporate bond market is overheating and it is hoped that the case of Tan Hoang Minh is not the first domino.
 
Addressing the NA Standing Committee’s meeting, NA Chairman Vuong Dinh Hue said about 40 percent of bonds issued last year were related to the real estate sector. “Currently, the outstanding balance is fairly large,” Hue said, adding that if unable to repay their debts, bond issuers will probably default.
 
While worrying about bond issuers’ circumvention of the law for illegal purposes, most experts agreed that the corporate bond market is an important fundraising channel for businesses and, therefore, should be protected and developed.    
 
According to Dr. Can Van Luc, chief economist of the Bank for Investment Development of Vietnam, who is also a member of the National Financial and Monetary Policy Advisory Council, the corporate bond market still has untapped potential.
 
“The current bond market is very young and has just grown at a relatively fast pace over the last five years,” he said at a conference titled “Sustainably developing the corporate bond market” recently held by the Nguoi Lao Dong (Laborers) newspaper.
 
Funds mobilized through the securities market, including both stocks and bonds, are now equivalent to 26 percent of the total capital supplied to the economy, of which around 22.7 percent comes from corporate bonds while merely 3.5 percent is raised through stock issuance. “So, the corporate bond market still has a lot of room for development,” the economist affirmed. 
 
Existing legal loopholes and remedies
 
The Government, in its Resolution 54 promulgating the cabinet’s program of action for implementation of the NA’s Resolution on restructuring the economy during 2021-25, sets the goal of raising the corporate bond market’s size to around 20 percent of GDP.  
 
Hence, the matter here is to identify and fix legal loopholes that might be taken advantage of so as to develop a sound corporate bond market.
 
In light of this, the MOF is now working on draft amendments to Decree 153 of 2020 on private placement and trading of corporate bonds, aiming to impose stricter conditions on bond issuers, especially those conducting private placements.
 
Under current regulations, enterprises may mobilize funds through private placements of bonds without having to seek for permission from state authorities and are just required to take responsibility for repaying their debts.
 
However, according to the MOF, there are still small-sized enterprises that mobilize large amounts of capital at high interest rates without collateral or with poor-quality collateral. The value of unsecured bonds issued in 2021 alone mounted to VND 83 trillion, accounting for 18 percent of the total bond value. 
 
“There are risks in case these enterprises issue bonds, because if their production and business activities struggle, they cannot repay the principal and interest to investors,” a representative of the MOF’s Department of Banking and Financial Institutions was quoted by the Vietnam Investment Review as saying. 
 
To prevent this worse-case scenario, the amended regulations, once promulgated, would compel businesses with high debt ratios to meet several requirements on collateral if wishing to mobilize capital through bond issuance. 
 
Conditions on bond buyers would also be tightened. As bond purchase via private placements is a high-risk investment, it is only suitable to professional investors who are able to analyze and assess risks and have sufficient financial ability. However, according to the MOF, current regulations on professional investors are loose, enabling bond salesmen to turn amateur investors into professionals, so that they may offer bonds to every investor, regardless of who they are. Hence, imposing stricter conditions is also a way to better protect investors.     
 
Another solution for transparentizing the bond market is to further develop and improve the quality of credit rating services.
 
At the above-said conference, Dr. Le Dat Chi from the University of Economics Ho Chi Minh City pointed out the necessity to formulate a law on credit rating, which, according to him, would provide investors with a firm legal ground to sue credit rating agencies once the latter fail to comply with professional standards. 
 
“If we wish to develop the debt market, we should devise a law [on credit rating practice],” he stressed. 
 
Meanwhile, Dr. Luc proposed the adoption of policies to encourage the establishment of credit rating agencies. “Countries such as Singapore and the Republic of Korea have a fairly well-developed corporate bond market but they do not require all enterprises to undergo credit rating before issuing bonds. As for Vietnam, the decision about whether credit rating should be encouraged or mandated needs careful consideration”, he said, suggesting that it might be compulsory in the initial time and then become voluntary when the market develops to a certain level.
 
In an interview with the Vietnam News Agency, lawyer Nguyen Thanh Ha from SBLAW firm suggested adding regulations on bond credit rating so as to improve publicity and transparency, thus raising the quality of bonds and concurrently forming the habit of using credit rating results to assess bond-related risks in conformity with international practices.  
 
He recommended the formulation of regulations on bondholder representatives in order to enhance the supervision of the use of proceeds from bond issuance as well as the performance of other commitments by bond issuers.
 
A market for privately issued bonds should be formed at Stock Exchanges with a view to increasing bonds’ liquidity while tightening the management and supervision of bonds traded in the secondary market. In addition, regulations on contents of and time limits for disclosure of information should be revised, Ha proposed.-
 
 

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