Corporate bonds have long been a useful source of financing for businesses and a traditional investment asset for investors all over the world. In the 1st quarter of 2021, around 38,325 billion VND of corporate bonds was issued. This represents a fall of around 30% compared to the same period in 2020, due to tightened private issuance regulations. Of this, around 6,235 billion VND was issued to the public. That accounted for 16% of the total volume of issued bonds, a higher proportion than in recent years. The industries with the most issued bonds were real estate, securities, banking, and infrastructure development. With interest rates remaining low, it is expected that corporate bonds issuance will thrive and remain vibrant for the remainder of 2021.
The general regulations for corporate bonds under Vietnamese law are included in the Law on Enterprises, the Law on Securities, Decree No. 155/2020/ND-CP (Decree 155) and Decree No. 153/2020/ND-CP (Decree 153), all effective since 1 January 2021.
The Law on Enterprises and the Law on Securities form the primary legislation covering general matters on bonds. The subordinate legislation, i.e. Decree 153, specifically regulates private issuance, trading of bonds in the domestic market, and bond issuance for the international market. Meanwhile, Decree 155 regulates public bond issuance and offering.
In this update, we will explore the key legal issues surrounding corporate bonds in Vietnam.
Corporate bonds are debt-based securities. In a nutshell, bonds create a loan to the issuer from the investors of the bond (the bondholder). A more technical definition is provided under Vietnamese law, where corporate bonds are a type of security issued by companies with a term of more than one year, confirming the legal rights and interests of bondholders with respect to a debt portion of the issuing company. Essentially, bondholders do not own equity in the issuing company and are only entitled to principal and interest payments. Bondholders may also transfer the bonds, subject to their terms and conditions.
Corporate bonds can be issued for domestic or international markets.
Vietnamese law sets out the following types of corporate bonds:
Secured bonds: Corporate bonds for which payment upon maturity of the whole or a part of the principal and/or interest is secured by assets of the issuing enterprise or of a third party; or for which there is a guarantee of payment in accordance with the law.
Convertible bonds: Corporate bonds issued by a shareholding company that may be converted into an ordinary share of the issuer on the terms and conditions specified in the bond issuance plan.
Bonds with a stock option: Corporate bonds issued together with a warrant by a shareholding company granting the bondholder the right to buy a specified number of ordinary shares of the issuer on the terms and conditions specified in the bond issuance plan.
Green company bonds: Corporate bonds issued to invest in an environmental protection project or a project conferring environmental benefits in accordance with the Law on the Protection of the Environment.
Although there is no official legal definition, corporate bonds in Vietnam may also be unsecured, for which there is no guarantee of payment.
Vietnamese law states that limited liability companies and joint-stock companies may issue bonds. In practice, bond issuance by joint-stock companies is more common.
A public offering of bonds is defined as an offer made via one of the following methods:
An offer via mass media;
An offer to 100 or more investors, excluding professional securities investors; or
An offer to undetermined investors.
To offer bonds to the public, the issuer must register and obtain a certificate from the State Securities Commission (SSC) of Vietnam.
First, a company willing to issue and publicly offer bonds for sale must, at the time the offer is registered, have at least VND 30 billion of paid-up charter capital calculated at the value recorded in the accounting books.
Second, business operations in the year immediately preceding the year the offer is registered must have been profitable. There must also not be accumulated losses calculated up to the year of registration and no debts payable overdue for more than one year.
Third, the company must have an issue plan as well as a plan for the utilisation and repayment of the proceeds earned from the offer tranche. These must be passed by the general meeting of shareholders, the board of management, the members' council, or the company owner. Besides, the issuer must undertake to discharge its obligations to investors regarding the conditions of the issue and payment. This should ensure the lawful rights and interests of investors, alongside other conditions. A securities company must also consult on the application file to register the public offering of bonds, except for cases where the issuing organisation is itself a securities company.
Fourth, the company itself, or the bonds registered for offering, must obtain a credit rating from a credit rating organization licensed by the Ministry of Finance where the total par value of bonds mobilised every 12 months or the total balance of its bond par values by the time the offer is registered is greater than the amount stipulated in Decree 155. An important requirement to bear in mind is that the issuer must not now be subject to criminal prosecution or have ever been convicted for a criminal offense in economic management order for which the police record has not yet been expunged.
Fifth, to receive payments for the purchase of bonds in the offer tranche, the issuer must open an escrow account.
Finally, the issuer must commit to and conduct a listing of bonds on the securities trading system upon completion of the offer tranche.
For convertible bonds and bonds with a stock option, the total par value of the issued bonds must not be greater than the total par value of the shares outstanding, except where there is an issuance guarantee with a commitment to purchase all the issued bonds for re-selling or all the un-distributed bonds. In addition, with respect to those issued for mobilizing capital to implement projects of the issuing company, the number of bonds purchased must account for at least 70% of the bonds contemplated to be offered. The issuing company must have a plan to make up for the capital falling short of that contemplated to be mobilised from the offer.
For secured bonds, on top of the general conditions for issuing and publicly offering bonds set out before, all or part of the payment for principal and interest of the bond must be secured by (a) a payment guarantee from a credit institution or (b) collateral of the issuer or a third party and (c) the issuer must appoint a representative of bondholders as required by law.
Decree 155 also sets out conditions for foreign companies and international financial institutions to issue bonds in VND to the public in Vietnam.
A private offering of bonds is defined as an offer for sale made not via mass media to:
fewer than 100 investors excluding professional securities investors; or
professional securities investors only.
Under Decree 153, if the issuer is a credit institution, they may directly sell bonds to an investor. Other issuance of bonds must be done through bidding, underwriting, or a sales agent.
A company that would like to issue and privately offer non-convertible bonds without a stock option for sale should be duly incorporated and operating in accordance with Vietnamese law. The company needs to satisfy financial prudence ratios and other ratios ensuring operational safety as prescribed by specialised laws, if any (such as the laws regulating credit institutions). It should also have an issuance plan approved and consented to by the competent corporate body of the company.
Furthermore, the company must have paid in full the principal and interest on issued bonds or have fully paid out debts on maturity within the 3 years immediately preceding the issue tranche (if any). The exception is the case of an offer of bonds to creditors who are selected financial institutions. This condition is not applicable for offering by securities companies and securities fund investment companies who are not public companies.
Furthermore, the financial statements of the year immediately preceding the year of the issuance should have been audited by an auditor meeting the conditions set out in Decree 153. Finally, bond purchasers must be entities eligible for purchasing privately offered bonds.
Only a joint-stock company can issue and privately offer convertible bonds or bonds with a stock option for sale, while the purchasers must be entities eligible for purchasing the offered bonds. In addition, bonds can only be offered if 6 months have expired since the date of completion of the previous offer tranche. Conversion of the bonds into shares and the exercise of warrants must satisfy the provisions on foreign ownership ratio in the relevant law.
Some other conditions for bonds issuance in multiple tranches are set out in Decree 153. These include that:
The issuer has a demand for raising capital in multiple tranches consistent with the purpose of issuing bonds approved in the bond issuance plan; and
There is a bond issuance plan in which the volume, timing, and capital use plan of each offering tranche is specifically contemplated.
If a company would like to issue non-convertible bonds without a stock option to the international market, it should first meet the general requirements for issuing bonds. Furthermore, it needs to ensure that the regulations on foreign exchange control and non-government guaranteed foreign loans borrowed by enterprises and repayment of such loans are satisfied. The offering conditions stipulated by the issuing market also need to be met.
The same criteria apply for international and domestic bond issuance.
Under Decree 153, purchasers of corporate bonds in a domestic private offering are limited to professional investors and, for convertible bonds, professional and strategic investors only.
The relevant parties in a bond issuance and offering are as follows:
A securities company providing consultancy on the application file to register the public offering: Which will also review, and be responsible for reviewing result of, the satisfaction of conditions applicable to the offer and the application file;
Payment guarantor: If the bond payment is guaranteed by a third party (bank guarantee or corporate guarantee);
Bidding, underwriting, or sales agent, i.e. lead arranger: Usually banks or securities companies appointed by the issuer to arrange the issuance and offering;
Qualified legal counsel;
Depository agent: Vietnam Securities Depository and Clearing Corporation (VSDC) or its depository member organisations;
Bond holders’ representative in case of public offers of secured bonds: A depository member of VSDC, or a securities investment fund management company which is appointed or selected to represent the rights and benefits of bondholders; and
The typical process of bond issuance and offering is as follows:
a. Prepare issuance and offering documents, sign agreements with relevant parties or agents;
b. Register with SSC as applicable, e.g. for public and private offering of convertible bonds or bonds with a stock option by public companies;
c. Disclose and/or provide notification of pre-offering information;
d. Distribute and sell bonds and collect payment;
e. Undertake post-offering disclosure and/or report of information; and
f. List bonds on the stock exchange, and/or deposit bonds with the VSDC or its depository member organisation.
The key obligations of bond issuers include:
Payment of principal and interest as per the bond’s terms and conditions; and
Disclosure and reporting of information.
Failure to comply with the bond issuer’s obligations may subject the issuer to civil, administrative, or criminal liabilities.
For corporate bonds privately issued before 1 January 2021, Decree 153 does not allow the bond issuers to amend the terms and conditions of the bonds. The bond issuers are only required to comply with Decree 153 in relation to disclosure and reporting of information. The repealed decree will govern other aspects.
Issuing bonds is an attractive option to raise capital for business activities. However, companies should pay attention to the relevant legal requirements so as to ensure that the issuance and offering are successful and legally compliant.
Mark Oakley / Managing Partner
Huyen Pham / Senior Associate
Duc Tran / Associate
This legal update is not an advice and should not be treated as such.
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