Legal solutions
The pressure and stress of the maturity date closing in on the corporate bonds market, especially for real estate bonds, has been a contentious issue since mid-2022. This situation was worsening as by the end of the year several big business owners were preparing to disburse valuable stocks to ease this looming crisis.
Some guidelines and solutions have been offered since then to reduce this stress. On 14 November 2022, the Ministry of Finance informed both issuers as well as investors that in case issuers face financial difficulties, they may take the initiative to develop a specific debt repayment plan and work in unison with investors to ensure the interests of investors and enterprises in issues such as debt restructuring; bonds swap negotiation; collaterals; and agreement to pay bond principal and interest with other assets.
Since the end of 2022 to the beginning of 2023, a number of bond issuers have negotiated with bond holders to convert debt obligations into real estate while others have negotiated the extension of the debt period. Until now, the pressure from corporate bonds maturing has been tense on everyone as businesses would have to pay off their bonds dues before being listed on the stock market. On 23 February 2023, the Hanoi Stock Exchange (HNX) named 54 enterprises that were late in paying principal and interest in Ho Chi Minh City due to shortage of liquidity.
With Decree 08 some temporary relief will follow and emergency solutions that have been introduced will ease the current situation. These solutions will provide a legal framework within which all businesses can resolve their issues with investors. Now businesses are in a better position to negotiate through a legal framework with creditors and resolve current ongoing difficulties to recover capital.
The stock market saw the corporate bonds maturity as a barrier in 2023, along with pressure of high interest rates and the prospect of declining business results of listed companies. Recently, interest rate pressure was partially removed with reduction in deposit interest rates starting from 6 March. Degree 08 will bring about further relief in the ongoing crisis in the corporate bonds market.
It is estimated that there will be about VND 252,000 bln worth of corporate bonds maturing in 2023, of which about 12% valued at VND 31,000 bln are due to mature by the first quarter, about 30.4% valued at VND 76,500 bln are due to mature by the second quarter, about 33% valued at VND 83,000 bln are due to mature by the third quarter, and 24.2% valued at VND 61,000 bln are due to mature by the fourth quarter.
Among these, real estate bonds are worth around VND 107,700 bln, which are causing the most worry as it will be extremely difficult to reverse their debt when businesses continue to run out of cash. Because of this there is immense liquidity pressure expected in the last two quarters of 2023. This is exactly what the stock market is fearing the most and may fall into a decline and fluctuate around 1,000 points.
Far reaching effect
This concern is well-founded because the real estate sector has far-reaching effects across many fields, from construction to raw materials to banking, which effect then also spills over to several other related sectors. This can lead to dire consequences for real estate projects that can stall, construction contractors can lose their jobs, and iron, steel, cement, and bricks could remain unsold.
When real estate businesses have no flowing revenue and no money to pay off city debts, they will also be unable to pay off bank loans. At such time, banks will have to create a provision for risks and thereby reduce their profit. The stock market will also not be able to end the prolonged downtrend under ongoing debt crisis.
With Decree 08 issuers will be able to negotiate with creditors and the debt repayment pressure will ease after the repayment period has been extended for another two years. Degree 08 will also allow more flexibility as part of the bonds can be paid with other assets. Although this problem cannot be resolved quickly, the stock market will still see the situation easing somewhat and based on such expectations the market could bounce back in the next few months ago. The market has a reason to believe that now the corporate bonds market will recover, and issuers will manage to repay their debts.
When the overall market is down, all stocks come under some pressure. Once the risk of bonds defaulting due to expiry date is pushed back then gradually groups of businesses will be in a situation to recover again and direct their attention to growth and profit of their various businesses.
