However, Decree 08 expires on January 1, 2024, and companies will then need to comply with the stricter Decree 65. This raises the question: will businesses be able to issue bonds normally again? And what are the biggest concerns for professional investors in this uncertain environment?
To discuss these issues, Saigon Investment sat down with Dr. LÊ ĐẠT CHÍ from Ho Chi Minh City University of Economics.
JOURNALIST: - Many investors still lack a clear understanding of corporate bonds. They often rely on recommendations from banks or securities companies when making investment decisions. Could you break down the current state of the corporate bond market in simple terms?
Dr. LÊ ĐẠT CHÍ: - Currently, corporate bonds in Vietnam fall into two main categories: those issued publicly under Decree 155/2022, and those issued privately under Decree 153 (later amended by Decree 65). The majority of the market falls under private issuances.
This means the typical buyers of these bonds are large investors. Imagine a company issuing a VND 1,000 billion bond offering. Only a handful of entities like banks, securities companies, or other large businesses (known as F1 investors) would purchase such a large amount.
If F1 investors are banks, they often act as intermediaries, reselling the bonds to their customers (F2 investors), typically bank depositors. These F2 investors often rely solely on the bank's reputation and "inside tips" from bank employees when making their investment decisions.
Similarly, if F1 investors are securities companies, they resell the bonds to clients within their network. To entice investors, these companies might offer additional services, contracts, or even guarantees to buy back the bonds if desired. Unfortunately, this leaves most F2 investors with limited understanding of the issuing company's financial health or the specific bond they're buying. They often make blind investments based on trust in banks, securities companies, and the assurances of their advisors.
- So, is the recent Decree 65/2022 a response to this ease of manipulation you described?
- Absolutely. The first Decree 65 aims to address some of the issues impacting F2 investors, specifically their reliance on trust in intermediaries. When dealing with something like bonds, relying solely on trust isn't wise. Both globally and here in Vietnam, buying any product, especially bonds, requires a clear understanding of the issuing entity, as they are the ones ultimately responsible for fulfilling debt obligations. Decree 65 makes it mandatory for buyers to comprehend and actively commit to understanding the terms of the bond.
Additionally, it restricts F1 investors like banks and securities companies from simply leveraging their reputation to guarantee bond quality. Practices like promising buybacks based solely on F2 investor demand are no longer allowed. Instead, any buyback guarantees must have specific conditions, such as the buyer being a professional investor. Furthermore, cross-selling of products between banks and securities companies, as permitted under Decree 153, is now prohibited.
- Under Decree 65, only professional investors can buy bonds. What exactly defines a professional investor in this context?
- Decree 65 provides a clear definition. To qualify as a professional investor, you must meet two requirements:
Firstly, portfolio value: You must hold securities worth at least VND 2 billion for at least six months prior to the bond purchase. This isn't simply the value of a single transaction, but the total value of your listed securities or bonds issued by specific companies that you've held for six consecutive months.
Secondly, trading certification: When buying the bond, you must also present proof of your professional investor status. This means obtaining a certificate from a securities company verifying that you meet the required standards for bond trading.
It's important to note that the VND 2 billion threshold refers to the value of your existing securities holdings, not the transaction value of the bond itself. This means you already need to have VND 2 billion invested in listed securities or certain company bonds before you can purchase any additional bonds under Decree 65. Holding these securities for at least six months is also a prerequisite.
Furthermore, if you bought bonds before Decree 65 came into effect and your portfolio value doesn't reach VND 2 billion even after a six-month grace period under Decree 08, you will not be considered a professional investor and won't be eligible to buy bonds under Decree 65's restrictions.
- Okay, so if I'm a professional investor and the issuer of a bond defaults, what kind of protection do I have under Decree 65?
- Two main aspects come into play here:
Firstly, transaction security: Decree 65 stipulates that bond transactions are no longer exclusively carried out through depository agent securities companies. Instead, they must be conducted via the Bond Depository Corporation. This centralized system enhances transaction security and preserves ownership records for investors, providing an additional layer of security compared to the previous system.
Secondly, investor awareness: Decree 65 underscores investor responsibility by necessitating the signing of a document acknowledging that they have "read all terms and information about the bond" before making a purchase. This encourages investors to actively engage with the product and gain a comprehensive understanding of its associated risks.
However, the concern remains: what happens if the issuer goes bankrupt and can't fulfill its obligations to investors? As a creditor, a bondholder theoretically has the right to claim repayment from the company. But in practice, this right isn't always easy to exercise. Debt collection procedures can be complex and time-consuming, even for established credit rating agencies.
Therefore, while Decree 65 enhances security and promotes informed investment, it's important to remember that investment carries inherent risks. Owning bonds makes you a creditor, but exercising your right to debt collection follows a specific legal order outlined in the Bankruptcy Law, unless you purchase bonds with a guaranteed payment service.
- You mentioned credit ratings for businesses, especially bond issuers. If a business has a good credit rating but then goes bankrupt, does that provide any real protection for investors?
- It's important to understand that credit ratings play different roles depending on the type of bond issuance.
Initially, with regards to private placements: According to Decree 155, private bond issuances are exempt from the necessity of having a credit rating. This exemption serves to alleviate undue burdens on smaller businesses aiming to attract private investors.
Secondly, concerning public bonds: Nevertheless, under Decree 155, in accordance with the new Securities Law, credit ratings are mandated for both the issuing company and the bonds themselves in public issuances. This stipulation is intended to furnish investors in larger, public offerings with supplementary information and risk assessment.
Now, here's the crucial point: a good credit rating doesn't guarantee zero risk of default. It's simply an external assessment, provided by a credit rating agency, that helps investors understand the company's financial health and potential risks. It's a tool for informed decision-making, not a safety net.
That said, credit ratings do offer several benefits: For issuers: A good rating improves a company's image and can attract investors, potentially at lower interest rates. For investors: A rating provides independent analysis and risk assessment, helping them make informed choices about their investments.
While not a guarantee, credit ratings are a valuable tool in the bond market. They don't provide absolute security, but they offer valuable information and a professional perspective on potential risks, leading to better-informed investment decisions.
- You raise a critical point. There's concern that Vietnamese businesses may misuse funds raised through loans or bonds, while still receiving seemingly good credit ratings from agencies. If such a default occurs, how accountable are these credit rating agencies?
- Internationally, credit rating agencies typically hold limited liability for bond failures and bankruptcies. However, most countries have regulations ensuring transparency and accountability in their rating processes. This prevents opacity and potential collusion between agencies and businesses, where rating criteria favor companies over protecting investors.
Unfortunately, such regulations remain unclear in Vietnam. This means that currently, investors lack legal recourse to sue rating agencies for inaccurate issuer or bond evaluations that contribute to their losses.
In my opinion, establishing clear regulations on credit rating agency disclosure and liability is crucial. This would enhance market fairness and empower investors to seek legal action in cases of misleading or inaccurate ratings.
- If a professional investor buys bonds from a company that later goes bankrupt, how does the Bankruptcy Law actually protect them?
- When it comes to bond security, a crucial factor is whether the bond is collateralized or not. Investors who buy collateralized bonds have a layer of protection. If the company defaults, that collateral (e.g., assets) can be used to settle outstanding debt obligations.
However, for investors who purchase unsecured bonds, things get trickier. Their protection relies on the company's ability to repay debts, and in bankruptcy situations, their position is more tenuous. Why? Because the Bankruptcy Law prioritizes secured creditors first. This means unsecured bondholders, which include most professional investors in this case, are at the back of the queue for debt recovery.
This is why unsecured bonds are typically offered at significantly lower prices. They carry higher risk, but potentially higher returns if the company performs well. However, in a bankruptcy scenario, unsecured bondholders face the harsh reality of being the last in line for potential asset distribution, making their investment highly vulnerable.
- Thank you very much.
