State moves to restructure bond market

(ĐTTCO) - All businesses issuing bonds in future will have to restructure their process in issuance of corporate bonds from 1 September 2020 when Decree 81/2020 will take effect, and which comes with some amendments to articles in Decree 163/2018 on process of issuing corporate bonds.  

State moves to restructure bond market

Conditions for issuance  

The amendment to Article 10 of Decree 163/2018 will ensure that the enterprise issuing the bond does not have outstanding debt exceeding five times the equity. Though this provision will limit the issuance scale of corporate bonds, it will not cause difficulties for businesses in issuing any corporate bonds. Although there is an openness in registering equity of many businesses that have large and very large capital, the actual contribution is uncertain. In order to deal with this uncertainty, from now on businesses will have to once again register size of equity with the issuing authority before issuing corporate bonds in the market.

Investors can easily identify the equity scale of any enterprise. Currently there are many listed companies that have stock prices much lower than book value or even at par value. A company's lack of transparency is the key to understanding low share prices. Some listed companies withdraw equity capital after making only a nominal entry, and use this declaration amount of capital to issue corporate bonds on a large scale. This the investor must understand very cautiously.

Recently, a new company was registered with an equity of about USD 6 bn, but actual capital contribution is hard to know. Therefore, the amendments in issuance conditions on Decree 81/2020 will call for businesses to pay more attention to the capital contribution. Failure to stipulate this condition in Decree 163/2018 had earlier helped many small capital companies to issue huge amounts of capital. One of them was the Hong Hoang Company with capital of only VND 5 bn but corporate bonds issued were worth almost VND 1,400 bn. However, Decree 81/2020 will now help in tackling this situation of businesses failing to fulfill their debt obligations to bond investors.

Maintaining dossiers on bonds

Changes to Decree 81/2020 also stipulate that enterprises must sign a consultancy contract with consulting organizations for maintaining dossiers on corporate bond issuance. This regulation will insist on keeping a record of all issuances of corporate bonds. As soon as Decree 81/2020 comes into effect, businesses that want to issue corporate bonds must sign a service contract with a consulting organization such as a securities company.

The securities company will then work towards applying for issuing of corporate bonds. This provision clarifies the content in Clause 3 of Article 15 on bond issuance mode in Decree 163/2018, which earlier only required content to be provided to a competent agency, while Clause 1 of Article 13 of Decree 163/2018 had required businesses to submit this service contract.

Another provision provided in Decree 81/2020 requires that the corporate bond issuance dossier shows that the purchasing contract includes a commitment by the concerned parties that they have fully understood the contents of the published information and are fully aware of the risks involved before buying or selling bonds.

This means that the business must sign a contract with the potential buyer of the bond. If this regulation is implemented, enterprises will search for investors to buy corporate bonds issued by them, before completing the dossier licensed by the competent authority. Licensing is only considered as a procedure in the issuing process, not a process for examining the issued document.

Thus, if a corporate bond issuer has not found a buyer, then the issuer must rely on the services of a securities company, or look for some organization to sign a bond purchasing contract with, in order to meet the requirements of the issuance dossier to authorize licensing, after which it has 90 days to search for other investors. Therefore, the contract to buy bonds in the dossier is just a procedural step to get a license. The best way after signing a contract with a securities company or issuing enterprise is to sign a contract to buy a bond that has conditions for cancellation.

Purpose of issuing bonds

Earlier, Decree 163/2018 only required that issuing businesses formulate issuance plans with the purpose of using the capital as understood in Item b of Clause 1 in Article 14. However now, Decree 81/2020 specifies purposes of capital use for the issuance of corporate bonds with three specific contents, that is, project investment, production and business activities, and debt restructuring. The amendment to Item b of Clause 1 in Article 14 will limit the issuance of corporate bonds that have been booming under Decree 163/2018. Accordingly, issuing businesses must clearly state the purpose of the issuance of corporate bonds, in order to raise capital to use for one of the above three contents.

In the last few years, Saigon Investment has run many articles on the Hong Hoang Company issuing corporate bonds for the sole purpose of buying back shares from investors. Saigon Investment also reported that issuers of corporate bonds had bought shares of another company that were involved in real estate projects, or had purchased shares of another production and business company for the purpose of an acquisition.

Before Decree 81/2020 takes effect on 1 September 2020, many applications are pending for approval by competent authorities concerning issuance of corporate bonds. These applications are seeking permission to use capital to issue corporate bonds to acquire shares in projects or other companies, and will be declared null and void by 1 September 2020. However, many businesses and commercial banks should now find solutions to restructure any debts of corporate bonds to avoid adding more bad debts.

Dr. Le Dat Chi Department of Finance, HCMC University of Economics

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