Vietnam's new regulations on corporate bonds

Important changes to be aware of 8 min read

On 16 September 2022, the Vietnamese Government issued Decree 65/2022/ND-CP (Decree 65) to amend the existing Decree 153/2020/ND-CP (Decree 153) on offering and trading of privately issued corporate bonds.

This was a part of the Government's effort to develop a more transparent and sustainable bond market. Generally, Decree 65 imposes more stringent conditions and requirements on the private placement of bonds, and seeks to increase transparency on the bond markets by tightening disclosure requirements. Decree 65 also introduces the concept of a centralized bond exchange system for registration and trading of bonds, which aims to be in operation by June 2023.

However, the introduction of Decree 65 has created various roadblocks for bond issuance, limiting Vietnamese companies' ability to raise funds. This, coupled with the need for alternative payment regimes to avoid a widespread default by issuers following recent turmoil in the real estate market, has resulted in the issuance of Decree 08/2023/ND-CP (Decree 08) on 5 March 2023, which amends and postpones the application of a number of provisions introduced by Decree 65. In this Insight, we set out the consolidated changes in Decree 65, as amended by Decree 08.

While Decree 153 applies to both domestic and international bonds, Decree 65, as amended by Decree 08, largely revolves around changes to domestic bonds. Unless otherwise noted, the key highlights of Decree 65 below apply to privately issued domestic bonds only. 

Changes introduced by Decree 08

Decree 08 amends and postpones the application of a number of provisions introduced by Decree 65, including:

1. Changes to bond terms and conditions: for bonds issued before 16 September 2022 (which is the effective date of Decree 65), the bond term could now be extended for a period of up to two years, and the bond terms and conditions could be amended if approved by (i) the relevant decision-making body (eg board of directors) of the issuer; and (ii) holders of at least 65% of bonds of the relevant class of bond. However, for bondholders who do not accept changes to the bond terms and conditions (including those who are not amongst the 65% approving bondholders), the issuers must honour the original bond terms and conditions announced to the bondholders;
2. In-kind payment for domestically issued bonds: an issuer that is unable to fully and timely pay bond principal and coupon in VND pursuant to the announced issuance plan may negotiate with bondholders to make payment by assets other than cash, provided that among others, (i) such payment is agreed by the relevant bondholder, and (ii) the issuer has made extraordinary disclosure on the relevant changes, and is fully responsible for the legal status of the assets being used for payment; and
3. Postponing the application of certain requirements: the timelines for the application of certain provisions under Decree 65 are postponed as follows:
   • the requirement to have a credit rating of the issuer in certain cases is postponed from 1 January 2023 to 1 January 2024;
   • the application of the new criteria for individual professional securities investors is postponed from 16 September 2022 to 1 January 2024; and
   • the application of the 30 days distribution period in multiple-tranche issuance is postponed from 16 September 2022 to 1 January 2024.

Key takeaways

• An issuer is no longer permitted to use bond proceeds for an increase of working capital or restructuring of its capital resources (except for restructuring of its own debts, which remains permitted). This applies to both domestic and international bonds.
• From 1 January 2024¹, an issuer will be subject to credit rating requirements if the bond value exceeds a certain threshold, or the bond/equity ratio exceeds a certain percentage. Security assets for bonds must be valued by a third-party valuer. An issuer must also engage a securities firm, custodian bank or securities investment fund management company to act as the agent for bondholders who are individual investors.
• Investors must be more responsible in their investment and must acknowledge that they understand both the bond terms and conditions, and risks associated with bond investment. Investors can also be subject to administrative and criminal liabilities for their breach of the law when investing in bonds.
• Privately issued bonds are now required to be centrally registered with the Vietnam Securities Depository and Clearing Corporation (VSD), deposited with a securities agent and registered with a bond exchange system under the stock exchange before trading.
• Issuers are subject to more enhanced disclosure requirements.
• For domestic bonds only, an issuer that is unable to pay bond principal and coupon in cash may negotiate with bondholders to make payment by assets other than cash².
• For bonds issued before 16 September 2022, issuers can agree with bondholders to amend the bond terms and conditions, but only if, among others, agreed by holders of at least 65% of the bonds of the relevant class. If there is an extension to the bond term, the extension must not exceed two years³.

Limiting bond proceeds use purpose

Issuers of both domestic and international bonds are no longer permitted to use bond proceeds for an increase of working capital or restructuring of their capital resources. Under new Decree 65, domestic bonds can only be issued to (1) restructure debts of the issuer itself; (2) implement investment project(s); or (3) other permitted purposes provided for under applicable laws.

Comparing to the most recent draft, Decree 65 has removed the specific restrictions on use of bond proceeds to contribute capital into other enterprises (through debt or equity), or to purchase secondary shares in other enterprises. It remains unclear as to whether bond proceeds can be used to contribute capital into a project company under the issuer to implement an investment project (or proceeds can only be used for investment projects of the issuer itself). We understand that the State Securities Commission is clarifying this point with the Ministry of Finance. 

New requirement on credit rating of issuer

From 1 January 2024⁴, a credit rating of the issuer (by a credit rating agency licensed by the Ministry of Finance) is required for bond issuance if:

• the total par value of issued bonds of such issuer in each 12-month period prior to the issuance date is greater than (i) VND500 billion (c. USD21 million); and (ii) 50% equity recorded on its latest financial statements; or
• the total par value of outstanding bonds of such issuer as at the time of registration for issuance is greater than 100% equity recorded on its latest financial statements.

The new requirement of a credit rating is expected to capture a wide range of enterprises, thereby potentially promoting the growth of a credit rating market. Further, it is expected that a credit rating agency will work as a third party's oversight of the issuer, which is a more reliable source for investors to assess their bond investment.

Other requirements for bond issuance process

Decree 65 introduces new requirements on the bond issuance process:

• Secured bonds: to issue 'secured bonds', issuers must have the secured assets valued by a third-party valuer. In addition, the offering documentation in this case must include those evidencing (i) the legal status of the secured assets, (ii) security registration, and (iii) payment ranking/order of bondholders at enforcement of secured assets.
• Segregated/escrow accounts for bond proceeds: issuers must open (i) a segregated current account to receive proceeds from an issuance of a 'vanilla bond'; or (ii) an escrow account to receive proceeds from an issuance of convertible bonds/bonds with warrants.
• Agent for individual investors: issuers who propose to issue bonds to individual investors must engage a representative/agent for bondholders, who could be (i) a securities custodian; or (ii) a securities investment fund management company.

Emphasizing responsibility and clarifying qualifications of bond investors

The changes in this section are to respond to recent market incidents where non-professional investors were negatively impacted by making high-risk bond investments without proper assessment. In particular:  

• Criteria for individual professional securities investors (IPSI): from 1 January 2024⁵, an IPSI must hold a portfolio of securities of at least VND2 billion (c. USD87,000), calculated using the average daily market value of the portfolio in a period of at least 180 consecutive days prior to the date of calculation. The value of margin trading loans and securities in a repo transaction are excluded for this purpose. Further, certification of a qualified IPSI is only valid for three months.
• Responsibility of investors: prior to subscription of a bond, an investor must sign a statement confirming that the investor (i) has examined bond offering documentation and understands bond T&Cs, (ii) understands risks relating to, and regulations on, bond investment and trading, and (iii) has considered and will be responsible for its investment decision. Such statement must also be signed by the issuer or a securities company authorized by the issuer, who shall be responsible for selecting qualified investors (including qualified IPSI).
• Administrative and criminal liabilities: Decree 65 emphasizes that investors, agents, issuance advisers and other organisations providing bond issuance-related services could be subject to administrative and criminal liabilities for their breach of the law. In the past, this burden was placed on the issuer only.
• Investment restriction: a bondholder is prohibited from selling bonds to, or co-investing in bonds with, non-professional securities investors.

Centralised registration and trading of bonds

Issued bonds are now required to be centrally registered with the VSD, deposited with a securities custodian and registered for trading on a 'bond exchange system' operated by a stock exchange before it can be traded. By comparison, Decree 153 only required deposit of the bonds with a securities custodian before trading.

The system for registration/deposit of bonds at the VSD and the bond exchange system are expected to commence operation by 16 June 2023. During the transitional period, transfer of bonds will still be conducted in accordance with Decree 153.

More stringent disclosure requirements to increase transparency

In addition to tightened conditions on the issuance process, issuers are now subject to generally more enhanced disclosure requirements:

• Post-issuance disclosure: the timeline for disclosing the issuance result is five business days from completion, reduced from 10 days as formerly stipulated under Decree 153.
• Unsuccessful issuance or cancellation of bonds: issuers must disclose unsuccessful or cancellation of issuance of bonds within five days from the ending of the bond-distribution period.
• Periodic reports: issuers must submit semi-annual reports and annual reports on, amongst other things, performance of their undertakings made to bondholders.
• Extraordinary disclosure: in addition to those stipulated under Decree 153, issuers must disclose (i) any change to any bond T&Cs; (ii) any change to the bondholders' representative; (iii) a mandatory early redemption; and (iv) receipt of the authority's decision on the issuer upon application of an administrative penalty in securities or 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 issuers of domestic bonds, except the extraordinary disclosure requirement above.

Other conditions to note

• Shortening distribution period in multiple-tranche issuance: From 1 January 2024⁶, the distribution period for bonds issued in tranches is reduced from 90 days to 30 days (from the date of public announcement of the issuance). All tranches must be completed within six months from the issuance date of the first tranche (as opposed to 12 months under the Decree 153).
• Change to bond T&Cs: bond T&Cs can only be amended if approved by (i) the relevant decision-making body (eg board of directors) of the issuer; and (ii) holders of at least 65% of bonds of the relevant class of bonds. Under Decree 65, for bonds issued before 16 September 2022, the issuers could not extend the term of the bonds. However, Decree 08 now allows (i) the bond term of such bonds to be extended for a period of up to two years, and (ii) the terms and conditions of such bonds to be amended, in each case if the above conditions are satisfied. However, for bondholders who do not accept changes to the bond terms and conditions (including those who are not amongst the 65% approving bondholders), the issuers must honor the original bond terms and conditions announced to the bondholders⁷.
• Early redemption: bondholders and an issuer can mutually agree on early redemption of the bonds. In addition, a bondholder can request mandatory redemption upon the occurrence of:
  • the issuer's breach of issuance or trading regulations, or breach of issuance plan; and such breach (i) is not rectifiable; or (ii) rectifiable but the measures for rectifying are not approved by at least 65% of bondholders of the relevant class of bonds; or
  • specific events contemplated in the issuance plan.
• In-kind payment for domestically issued bonds:an issuer that is unable to fully and timely pay bond principal and coupon in VND pursuant to the announced issuance plan may negotiate with bondholders to make payment by assets other than cash, provided that among others, (i) such payment is agreed by the relevant bondholder, and (ii) the issuer has made extraordinary disclosure on relevant changes and is fully responsible for the legal status of the assets being used for payment⁸.