Towards a transparent and sustainable bond market
8 minute read
On September 16, 2022, the Vietnamese government issued Decree 65/2022/ND-CP (Decree 65) amending the current decree 153/2020/ND-CP (Executive Order 153) on the offering and trading of private corporate bonds.
The issuance of Decree 65 is the latest effort in the government’s action plan to develop a more transparent and sustainable bond market. Generally speaking, Executive Order 65 imposes stricter conditions and requirements on the private placement of bonds and aims to increase transparency in bond markets by tightening disclosure requirements. Executive Order 65 also introduces the concept of a centralized bond exchange system for registering and trading bonds, which aims to be operational by June 2023.
While Executive Order 153 applies to both domestic and international bonds, Executive Order 65 largely relates to changes to domestic bonds. Unless otherwise stated, the key highlights of Executive Order 65 below apply only to domestic bonds issued by individuals.
Key points to remember
- An issuer is no longer permitted to use bond proceeds to increase its working capital or restructure its capital resources (except to restructure its own debt, which is still permitted). This applies to national and international obligations.
- An issuer will be subject to credit rating requirements if the value of the bond exceeds a certain threshold or if the bond-to-equity ratio exceeds a certain percentage. Bond security assets must be appraised by a third-party appraiser. An issuer must also mandate a securities firm, custodian bank or securities investment fund management company to act as agent for bondholders who are retail investors.
- Investors need to be more responsible in their investments and need to recognize that they understand both the terms and conditions of bonds and the risks associated with bond investments. Investors may also be subject to administrative and criminal liability for breaking the law when investing in bonds.
- Bonds issued by the private sector must now be registered centrally with the Vietnam Securities Depository and Clearing Corporation (VOD), filed with a securities broker and registered with a bond trading system under the jurisdiction of the stock exchange prior to trading.
- Issuers are subject to more stringent information requirements.
Limitation on Use of Bond Proceeds
Domestic and international bond issuers are no longer permitted to use bond proceeds to increase their working capital or restructure their capital resources. Under the new Decree 65, national bonds can only be issued to (1) restructure the debts of the issuer itself; (2) implement the investment project(s); or (3) for other purposes permitted by applicable law.
Compared to the most recent draft, Executive Order 65 removed specific restrictions on the use of bond proceeds to provide capital to other businesses (through debt or equity) or to purchase secondary stock. in other companies. It remains unclear whether the bond proceeds can be used to provide capital to a project company under the aegis of the issuer to implement an investment project (or whether the proceeds can only be used for the issuer’s own investment projects). We understand that the State Securities Commission is clarifying this point with the Department of Finance.
New issuer credit rating requirement
From 1 January 2023, an issuer credit rating (by a credit rating agency approved by the Ministry of Finance) is required for the issuance of bonds if:
- the total nominal value of the bonds issued by this issuer during each 12-month period preceding the date of issue exceeds (i) 500 billion VND (approximately 21 million USD); and (ii) 50% equity recognized in its latest financial statements; Where
- the total par value of the outstanding bonds of this issuer at the time of recording for issuance exceeds 100% of the equity recorded in its latest financial statements.
The new requirement for a credit rating is expected to affect a wide range of businesses, potentially encouraging the growth of a credit rating market. Additionally, a credit rating agency is expected to function as a third-party issuer watchdog, which is a more reliable source for investors to assess their bond investment.
Other Bond Issuance Process Requirements
Decree 65 introduces new requirements on the bond issuance process:
- Covered bonds: to issue “covered bonds”, issuers must have the covered assets appraised by a third-party appraiser. In addition, the offering documents in this case must include those evidencing (i) the legal status of the secured assets, (ii) the registration of the securities and (iii) the classification/payment order of the bondholders at the time of the offering. execution of secured assets.
- Segregated/escrow accounts for bond proceeds: issuers must open (i) a separate current account to receive the proceeds of an issue of a “vanilla bond”; or (ii) an escrow account to receive the proceeds of an issue of convertible bonds/bonds with warrants.
- Agent for Retail Investors: issuers who propose to issue bonds to retail investors must engage a representative/agent for the bondholders, which could be (i) a securities depository; or (ii) a securities investment fund management company.
Emphasize responsibility and clarify qualifications for bond investors
Changes to this section are intended to address recent market incidents where retail investors have been negatively impacted by making high-risk bond investments without proper valuation. Especially:
- Criteria for Individual Professional Investors in Securities (IPSI): Decree 65 clarifies the criteria for an IPSI. In particular, it requires an IPSI to hold a securities portfolio of at least VND 2 billion (approximately USD 87,000), calculated using the average daily market value of the portfolio over a period of at least 180 consecutive days prior to the date of calculation. The value of margin commercial loans and securities in a repurchase transaction is excluded for this purpose. In addition, the certification of a qualified IPSI is only valid for three months.
- Rinvestor responsibility: before purchasing a bond, an investor must sign a declaration confirming that the investor (i) has reviewed the documentation of the bond issue and understands the terms and conditions of the bonds, (ii) understands the risks associated with investment and bond trading, and (iii) has considered and will be responsible for its investment decision. This declaration must also be signed by the issuer or a securities company approved by the issuer, which will be responsible for the selection of qualified investors (including qualified IPSIs).
- Administrative and criminal liability: Executive Order 65 emphasizes that investors, agents, issuance advisers and other organizations providing services related to the issuance of bonds could be subject to administrative and criminal liability for their violation of the law. Previously, this burden fell solely on the issuer.
- Investment restriction: A bondholder is prohibited from selling bonds or co-investing in bonds with non-professional securities investors.
Central registration and bond trading
Bonds issued must now be centrally registered with the VSD, deposited with a securities depository and registered for trading on a “bond exchange system” operated by an exchange before they can be traded. In comparison, Executive Order 153 only required the bonds to be deposited with a securities depository prior to trading.
The bond registration/deposit system at VOD and the bond trading system are scheduled to come into effect on June 16, 2023. During the transition period, the transfer of bonds will still be carried out in accordance with Executive Order 153.
Stricter disclosure requirements to increase transparency
In addition to the tightening of the conditions of the issuance process, issuers are now subject to generally more stringent information requirements:
- Post-Issuance Disclosure: the deadline for communicating the result of the issue is five working days from the date of completion, instead of 10 days as previously stipulated by decree 153.
- Unsuccessful issuance or cancellation of bonds: issuers must declare the failure or cancellation of the bond issue within five days of the end of the bond distribution period.
- Periodic reports: issuers must submit half-yearly reports and annual reports on, among other things, the fulfillment of their commitments to bondholders.
- Extraordinary disclosure: in addition to those provided for by decree 153, issuers must disclose (i) any modification of the bond T&Cs; (ii) any change in the representative of the bondholders; (iii) mandatory prepayment; and (iv) receipt of the authority’s decision on the issuer following the application of an administrative sanction in securities or in the securities market, in each case, within 24 hours upon the occurrence of such events.
International bonds are subject to changes similar to those applicable to domestic bond issuers, except for the extraordinary disclosure requirement above.
Other conditions to note
- Shortening of distribution period in multi-tranche issues: the distribution period for bonds issued in tranches is reduced from 90 days to 30 days (from the date of the public announcement of the issue). All tranches must be completed within six months from the date of issuance of the first tranche (compared to 12 months under Executive Order 153).
- Modification of the general conditions of the bonds: the bond T&Cs can only be modified if approved by (i) the competent decision-making body (for example, the board of directors) of the issuer; and (ii) at least 65% bonds of the relevant class of bonds.
- Prepayment: the bondholders and an issuer may mutually agree to the early redemption of the bonds. In addition, a bondholder may request mandatory redemption in the event of the occurrence of:
- the issuer’s breach of issuance or trading regulations, or breach of the issuance plan; and such breach (i) is not rectifiable; or (ii) rectifiable but the rectification measures are not approved by at least 65% of the bondholders of the category of bonds concerned; Where
- special events provided for in the issue plan.