Vietnamese issuers are tackling their debt problems, helped by a revamped restructuring regime and the removal of grey areas in real estate financing.
Vietnam introduced Decree 08/2023, a debt restructuring regime, in March 2023 in response to a growing wave of defaults in the onshore bond market in 2022, especially from property companies. Before the decree there was no legal framework or mechanism for issuers and bondholders to change the terms of outstanding bonds.
“Since the new regulations were implemented in March 2023, around 75% of bond issuers that defaulted on their principal or interest repayments had reached agreement with bondholders on some form of debt restructuring,” wrote Vietnam Investors Service (VIS Rating), an affiliate of Moody’s, in a note this month.
In July, the first restructuring of a Vietnamese offshore debt security from a private sector company was successfully completed. Property developer No Va Land Investment Group, one of the country’s biggest, extended the maturity of US$300m of convertible bonds after it defaulted on its interest payment in July last year.
The CB was originally issued in 2021 with a maturity of July 16 2026 and an investor put option in July 2024 to give a yield of 6%. In July, it extended the maturity to June 30 2027 with an unchanged coupon and lowered the conversion price. Coupons will be paid in kind until 2025, and bondholders have the option to redeem 50% of the principal in December 2026.
The transaction utilised the Singapore International Commercial Court to restructure the bonds under a pre-packaged scheme of arrangement, the first time a Vietnamese issuer had done so.
“When assisting No Va Land on this restructuring exercise, we had to consider all factors that might limit the company’s ability to make offers to bondholders," said a spokesperson for Vietnamese law firm YKVN, which advised No Va Land. "Not only regulatory constraints but also all the macro sensitivity towards bond offerings in Vietnam lately."
No Va Land has also extended the maturity of onshore debt with a principal value of D9.2trn (US$370m) and exchanged bond principal of D2.346trn into equity of a project, as well as successfully negotiating with bondholders and contractors to exchange their claims, totalling around D2.5trn, into properties, the company said in April.
Almost three-quarters of onshore bond restructurings have involved maturity extensions, wrote VIS Rating.
Decree 08 suspended the implementation of some tougher requirements imposed in Decree 65, which took effect in September 2022 in an effort to raise standards in the bond market. Under Decree 65 bonds issued before September 18 2022 could not have their maturities extended and there were tougher requirements for individuals to qualify as professional investors in the bond market.
Opportunity to term out
Lifting those requirements until January this year gave issuers an opportunity to term out their debts, leading to huge corporate bond volumes last year. In 2023, D36.9trn in principal amount of bonds were extended to 2024–2025, according to a report from the Vietnam Bond Market Association.
“We expect maturity extension will remain as the preferred way to resolve defaults among issuers and bondholders, as the process is less complex involving only the issuer and bondholders and subject to fewer legal challenges than other mechanisms allowed under local regulations,” VIS Rating wrote, noting that extending maturities in return for higher interest payments is often the most cost-effective approach for retail investors.
Other options include swapping the bonds for other assets or liquidating assets, but these alternatives are more time-consuming, since they require third parties to undertake complex procedures like asset valuation, collateral management and ownership transfers.
Law firm YKVN's spokesperson said there are some kinds of transactions not specifically covered by Vietnam’s restructuring law, such as exchange offers. That means that issuers need to consult with regulators for ad hoc guidance, while the State Bank of Vietnam needs to approve changes to any bond terms.
“Since 2023, we observed an increasing number of negotiations among issuers and bondholders to extend bond repayment dates resulting in higher bond coupon rates, stricter covenants, and additional collateral pledges, which in our view, is credit positive for bondholders,” wrote VIS Rating.
The average recovery rate for onshore bondholders has improved to 20 cents in the dollar as of August 2024, up from 3 cents in March 2023, according to VIS Rating. Bonds secured by liquid assets like securities tend to have higher recovery rates than those backed by hard assets like real estate. In practice, rights to land and real estate projects are usually used as security for bank loans.
Offshore debt cannot be secured against certain kinds of assets, like land and hard assets in Vietnam.
Seizing collateral can be a time-consuming process if borrowers do not cooperate, according to Oanh Nguyen and Thuy Van Pham at Baker McKenzie. Nguyen is managing partner and head of Baker McKenzie's banking and finance and capital market practices in Vietnam, while Pham is special counsel in the banking and finance practice there.
"Due to the incomplete regulations on collateral foreclosure and ownership transfer during enforcement, creditors in many cases need to seek support from various local authorities," Nguyen and Pham said in written comments to IFR. "If the collaterals are securities, there is little guidance in terms of regulations on transfer of ownership for mortgaged securities in case of enforcement, thus the creditor needs to work with various parties including the custodian/broker, relevant stock exchanges and authorities such as the State Securities Commission and Vietnam Securities Depository and Clearing Corporation."
If the creditor is from overseas and does not have a security agent in Vietnam, the enforcement process can take even longer as Vietnamese authorities may request for additional documentation.
Maturity wall
In the second half of this year, onshore bonds with a principal value of D139.675trn will mature, of which 42% are from the real estate sector, according to the VBMA. Bonds with a principal value of D11.3trn were in default as of Q1, and the real estate sector accounts for 63% of bond defaults by value since November 2022.
“This is a period of fairly high redemptions for developers, so there will be more defaults unless they are allowed to roll over their debt,” said Dan Svensson, senior strategist at Dragon Capital, an asset management company in Vietnam.
Negotiating a change of terms to a bond is more difficult if it is held by a large number of retail investors. Retail investors are generally restricted to buying only listed bonds, since tighter rules came into effect this year, and even onshore funds are allowed to have no more than 10% of their assets invested in unlisted bonds. Offshore funds are not subject to the same requirement.
“If it’s listed it’s very hard to unify investors,” said Svensson. “In late 2022 and 2023 many private placements were also in the hands of retail investors, and it caused huge problems in coordinating if something went wrong with the bonds.”
The government this month passed new laws covering land, housing, and the real estate business, aiming to clear up grey areas that existed before, and has been finalising development masterplans for cities and provinces.
“Besides restructuring, the focus this year has been on resolving legal bottlenecks,” said Minh Trinh Hoang, associate director for research at Dragon Capital. “The government realises that if the legal side is stuck then nothing will flow.”
Before the latest reforms, the way property companies funded and sold their projects was a grey area.
“In the last cycle, some developers launched their project even before the proper sales permit, by utilising a so-called business cooperation contract and some banks offered short-term loans to buyers with this kind of contract,” said Hoang. “The problem arises when the developer could not get a sale permit due to a legal delay, resulting in buyers being left unprotected. With the new land laws and more educated buyers, these kinds of contracts will likely disappear. Both banks and buyers now will ask for a proper sale permit from the developer before considering buying property or offering mortgages.”
At the same time, the new rules should also raise the standards of new bond offerings. Due to the tougher regulatory framework and increased collateral requirements, only high quality issuers are able to sell new issues at present.
“For those companies that can issue, it’s a seller’s market,” said Svensson. “They know they don’t have to pay high coupons because they are in demand.”