Corporate bond market reform adds safety net for investors

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The long-awaited Decree No. 65/2022/ND-CP issued last week on regulating the issuance of corporate bonds through private placement comes almost a year after the delay of the first draft.

Nguyen Hoang Duong, Deputy Director of the Banking and Financial Institutions Department of the Ministry of Finance (MoF), said, “We strongly believe that several provisions would lay a concrete foundation for developing a transparent and sustainable corporate bond market to protect the interests of both issuers. and investors, overcome recent market failures and minimize potential risks.

SSI Securities said the executive order allows for a relatively accommodative set of issuance conditions for issuers, while also requiring issuers to submit to post-issuance evaluation and careful disclosure. At the same time, the definition of what constitutes a professional retail investor has been tightened and additional regulations have been put in place to improve transparency and legal compliance for bond service providers.

“This piece of legislation shows that the government does not wish to impose unduly onerous restrictions on corporate issuers – particularly property developers – and wishes to provide a reasonably adequate funding channel mechanism through the bond market to help meet the needs in corporate capital while helping to avoid potential risks of corporate default over the 2023-2025 period – years in which a large number of bonds are maturing,” SSI noted.

At the same time, supporting such a funding channel via this revised corporate bond framework could be a more efficient way of long-term financing the economy so as not to rely too heavily on bank credit, the house of deliberations pointed out. brokerage.

Market Impact

According to data provider FiinGroup, Decree 65 is expected to improve the standards of professional investors, enhance information transparency and protect investors’ interests. In addition to having a portfolio of at least 2 billion VND ($84,000), professional investors must maintain this figure on a 180-day moving average. These requirements will significantly affect the current structure of corporate bond investors.

“We highly value the voting rights clauses and 65% approval rating of total outstanding bonds to help bondholders proactively gather information about the companies and projects in which they invest. “, noted FiinGroup.

“Furthermore, the new regulation allays market concerns as companies are allowed to issue bonds for debt restructuring. We believe this is the right direction and consistent with international practice. As the new decree requires mandatory credit rating for issuers, we believe that it is appropriate regulation and suitable for the Vietnamese market context, as well as effective and efficient market operations.

At the same time, according to the Ministry of Finance, the primary market for corporate bonds in the first seven months of this year attracted 46.1% of investors from credit institutions, 22.4% from securities companies and 10, 1% of individual professional investors.

However, secondary market data reveals that the proportion of corporate bonds held by retail investors has increased to 32.6%, mainly due to transactions carried out through securities firms. Many securities companies in the market encourage non-specialist retail investors to buy a large number of corporate bonds as a high-yield savings product.

Some experts predict that Executive Order 65 will make it easier for companies to issue bonds and raise funds. Although the credit limit of many commercial banks has been extended, it remains insufficient to meet capital needs, especially those in the real estate and energy sectors, which have medium to medium capital needs. long term.

There is a lack of corporate bond issuance in these sectors, with some months seeing only one or two issuances across the sector. Executive Order 65 will incentivize qualified issuers to quickly develop a bond issuance strategy, experts said.

Looking for new channels

In addition, the new decree could transform the disjointed trading of corporate bonds into an organized and systematic trading market, from which the process of issuing bonds can be regulated from start to finish. The centralization of the depository within Vietnam Securities Depository and Clearing Corporation can also contribute to better bond management, including defining professional investors and protecting their interests.

“Establishing a separate bond exchange market will strengthen the distribution of corporate bonds, limit acts of rampant bidding and violate regulations. This is a viable option to improve liquidity in the current market, as we estimate there will be over VND 1.5 quadrillion ($63.2 billion) of outstanding corporate bonds placed in the market. new system by the end of 2023. However, we anticipate that the increase will not be too high due to lack of demand due to stricter conditions for determining the status of professional investors,” said FiinGroup.

Unlike previous drafts, Executive Order 65 still allows companies to issue corporate bonds for debt refinancing, but only for the company itself. This will reinforce the need for companies to find other refinancing channels, especially real estate companies that have many subsidiaries/affiliates to develop projects. The real estate sector alone accounted for 59% of the total value of maturing bonds, and the pressure from corporate bonds maturing this year alone reached VND35.56 trillion ($1.54 billion) and will rise sharply to reach 61.37 trillion VND ($2.67 billion) in 2023.

As a result, FiinGroup believes the coming quarters will be difficult for companies to manage cash flow to repay bond principal and interest, as the corporate bond market has shrunk significantly since the start of the year. ‘year.

It will be more difficult to meet future debt obligations as the interest rate is expected to rise, which will increase the burden of interest charges for many businesses, especially those in capital-intensive sectors but which have difficulty accessing credit, such as real estate.

For investors, although the conditions for determining individual professional investors have become stricter than before, they are better protected when there is a better reporting mechanism and higher corporate commitment responsibility, with voting rights on corporate bond issues they own.

Retail investors are also required to purchase public offering bonds with registration certificates for sale issued by the State Securities Commission or switch to purchase fund-of-funds certificates. ‘investment. As a result, the purpose of buying corporate bonds is more tightly regulated, resulting in a change in the size of the private placement market, but also a diversification of participants among professional investors, insurance companies, bond funds and voluntary pension funds, among others.

On the other hand, mandatory ratings, in accordance with Decree 65, can help reduce the information asymmetry between issuers and retail investors, who have limited financial knowledge and self-analytical skills and are easily led by unorthodox news feeds. Companies with a solid financial position and legally qualified projects can raise funds at a lower cost because the risk premium is reduced.

“This is not an attempt to severely restrict issuance conditions, but to help the market operate more transparently and efficiently,” FiinGroup said.

Source: VIR

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