Decree raises standards for corporate bond market

Tuan Li nh

The government’s Decree 81, which comes into effect on 1 September 2020, will help raise standards in the corporate bond market as well as removing low-quality issuers in order to better protect investors.

Areport released by the BIDV Training and Research Institute said that since the end of 2018 when Decree 163 was promulgated, the corporate bond market has made great leaps. Market capitalisation in 2018 was only 9.01 percent of the country’s GDP, but increased to 10.85 percent in 2019, equivalent to about VND640,000 billion (USD27.6 billion). Volume of corporate bonds issued in 2019 reached over VND332,000 billion (USD14.3 billion). In the first six months of 2020, 130 enterprises issued bonds, mobilising a total of over VND156,000 billion (USD6.7 billion) through 818 issuance batches (up 50 percent year-on-year). The size of the corporate bond market grew at an average rate of 45 percent per year from 2017 to June 2020.

According to experts from BIDV Research and Training Institute, although this is a good signal for the economy and the financial system, it shows signs of "hot" growth. Except for institutional and professional investors, the increased investment by individual investors (including those who do not have the ability to analyse and evaluate, but are only interested in interest rates) will pose risks to investors, issuers and market stability. Risks are also persistent as some companies have issued bonds with total values beating their equity capital by many times.

Decree 81 promulgated on 10 July 2020 aimed to amend and supplement a number of articles of Decree 163 regarding private placement of bonds to make the market more sound and control risks. Following are some new provisions of Decree 81.

First, limiting the size of private issuance based on capital of the business: Decree 81 requires enterprises to meet financial safety ratios according to specialised laws. In particular, outstanding balance of private placements at the time of issuance must not exceed its owner’s equity by three times according to the latest quarterly financial statements. At the same time, the outstanding balance of bonds (including the volume expected to be issued) and outstanding balance of private placements must not exceed owner’s equity by more than five times (not applicable to credit institutions). Second, limiting the division of private placements into smaller groups or different batches to increase capital mobilised from individual investors. Decree 81 reduces the number of times for bonds issued by enterprises, regulating that the gap between two issuance batches must be at least six months and each issuance must be completed within 90 days from the date of disclosure.

Third, specifying the purpose of capital use in the private placement documents: businesses must specify the purpose of bond issuance in the issuance documents. For credit institutions, the purpose of the issuance is to increase tier 2 capital and/or to lend, invest or for other purposes. Such information must be clearly disclosed through the commitment by investors that they have fully accessed the disclosed information prior to the issuance and understood the potential risks. Time for information disclosure before the issuance is shortened to at least three working days from at least 10 working days.

Fourth, enhancing the professionalism of and supervision over private issuance by businesses. Decree 81 requires issuers to sign a consulting contract with an issue advisory firm, unless the issuer is an organisation permitted to provide an issue advisory service. Accordingly, the issue advisory company must be responsible for reviewing the meeting of conditions on issuance and documents as specified in Decree 81 as well as other relevant legal regulations. In addition, Decree 81 also regulates sanctions for violations of private issuance.

Last but not least, the decree requires clearer information disclosure and synthesis, with businesses required to make full information disclosure according to guidance from the Ministry of Finance. Issue advisory organisations shall report periodically on the issue advisory. Stock Exchanges shall be responsible for synthesising information on corporate bonds and making reports on a monthly, quarterly and annual basis. Such amendments are expected to have positive impacts on information disclosure, helping competent authorities promptly regulate the development of the market.