The State Bank of Việt Nam has unveiled a preliminary revision to Circular 16, requesting public input on proposed modifications that would permit credit institutions to procure corporate bonds as a means of boosting liquidity in the corporate bond market.

 

The revision corresponds to Decree 08 of the Government, which went into effect on March 5 and aims to address bottlenecks in the corporate bond market.

 

Circular No. 16/2021/TT-NHNN, issued on November 10, 2021, delineated principles for the acquisition and sale of corporate bonds by credit institutions. The preliminary revision aims to clarify and expound on various components of Circular 16 to avoid ambiguities and gaps.

 

The notable changes include more specific regulations for banks in investing in corporate bonds, such as banks’ responsibility of inspecting and supervising proceeds from bond issuance, criteria for banks to buy bonds, as well as regulations on the management of bonds to supplement working capital and cash flow management.

 

The rule allowing credit institutions to sell and buy unlisted corporate bonds sold before December 31, 2023, without having to wait 12 months as currently stipulated draws the attention of the market.

 

Data from the Vietnam Bond Market Association (VBMA) showed in December 2022, nearly VNĐ50 trillion (US$2.1 billion) worth of bonds were bought back before maturity.

 

However, the number in the first two months of this year decreased to only VNĐ10 trillion. According to the association, this indicator shows the issuers are struggling to have money to repay the debt.

 

In the context that about VNĐ150 trillion (roughly VNĐ6.4 billion) worth of bonds will mature in the second and third quarters of 2023, market analysts expect the permission for banks to buy corporate bonds will be a great support.

 

"Corporate bonds are different from bank loans because they have low liquidity," Đinh Thị Quỳnh Vân, general director of PwC Vietnam and the lead partner of Tax and Legal Services told VTV1. "Banks have the right to repurchase and resell them, which can boost liquidity and support bond issuers."

 

To limit risks, the draft will only allow banks to buy bonds when the issuing business meets certain conditions, such as having a feasible issuance plan, being able to repay principal and interest, or having a low debt ratio and not allowing to use proceeds to contribute capital or buy shares in other companies.

 

According to data from Fiin Group, banks are holding over VNĐ253 trillion of corporate bonds, equivalent to about 29 per cent of total outstanding bonds. This figure is lower than the number of 45 per cent in 2021.

 

Therefore, banks still have room to increase their bond ownership through repurchasing, helping to clear the deadlock in capital flow for issuing businesses.

 

Need a comprehensive support package

 

According to many market insiders, credit institutions cannot buy corporate bonds of companies whose debt exceeds five times their own capital, which will exclude a lot of bonds issued by realty firms.

 

The regulation that allows banks to buy bonds to supplement working capital in the short-term of less than one year also causes a headache for companies as businesses rarely issue short-maturity bonds (typical bond terms are five to ten years).

 

According to Nguyễn Quang Thuân, chairman and CEO of Fiin Group, one of the most important issues for bond issuers today is the need to refinance or restructure debt, but regulations of debt restructuring has not yet been revised in this draft.

 

He said this measure is more technical because the key is still the improvement in cash flow from businesses, but the outlook has not shown any signs of improvement.

 

Therefore, a cross-effect on the credit quality of banks is present, he said, adding when a business is late in paying bonds, it will then be likely to be late in repaying bank loans and likely turning to bad debts.

 

"This is an issue that should be evaluated specifically and have follow-up policies to solve the current corporate bond problem and reduce the risk of bad debt for banks," Thuân said.

 

Real estate businesses are also proposing that the corporate bond redemption should last until the end of 2024 instead of just 2023, as in the revised draft, because the maturity pressure is not only within this year.

 

"The total value of realty bonds due in 2023 and 2024 may reach VNĐ230 trillion," said Lê Hoàng Châu, chairman of Hồ Chí Minh City Real Estate Association. "Therefore, we propose to extend the implementation of Point a, Clause 8, Article 4 to ‘until the end of December 31, 2024’ instead of 2023 so that businesses can negotiate with bondholders on the payment." — VNS