This will create conditions that will hold businesses responsible when issuing bonds and put an end to easy and cheap cash flow.
Decree 65 was issued after much deliberation and consultations with market analysts with a firm goal to clean up and make the corporate bonds market very much transparent. In a recent report evaluating Decree 65, Viet Capital Securities Joint Stock Company (VCSC) said that compared to the previous Decree 153, the current Decree 65 tightens regulations for both issuers and investors buying bonds.
Accordingly, it is required that the issuer must clearly state the purpose of the bond issuance, and the issued bonds should be associated with a specific investment plan or project. Decree 65 also introduces stricter requirements for the disclosure of information by bond issuers. For investors, Decree 65 enhances investor responsibility as well as risk awareness when investing in corporate bonds.
Therefore, with the new regulations, the corporate bonds market will eliminate weak issuers and control misuse of capital. Decree 65 is a turning point to help create clean dealings for investors. Enterprises and issuers that really have financial potential and governance capacity will continue to effectively mobilize corporate bonds. Investors who are identified as more professional will be able to invest in better quality commodities because of more participation of independent and intermediary members such as credit rating agencies. During the issuance, the representative of a depository member of the Vietnam Securities Depository and Clearing Corporation, the securities investment fund management company, is appointed or selected to represent the interests of bondholders.
When Decree 65 took effect, most of the opinions were of the view that it would help open up capital for businesses and promise a brighter picture of the corporate bonds market. It can be seen that according to Decree 65, the requirements for private placement are stricter. For instance, issuers are not allowed to issue corporate bonds for the purpose of increasing the size of their working capital. This will directly affect the issuer which is the banks. Previously, banks issued bonds individually to mobilize medium and long-term capital, help balance capital and increase Tier 2 capital, and ensure Capital Adequacy Ratio (CAR). Now the issuance for the purpose of increasing capital will be limited.
Banks not only have a narrow door to mobilize bonds capital under Decree 65, but the investment and trading of corporate bonds will also be regulated by Circular 16 and credit room conditions. Previously, partly because of attractive corporate bond interest rates, many corporate bond investment banks were not really transparent in their dealings. This puts the banks at risk. Now, Decree 65 has tightened businesses that are not clean, leading to a less supply of bonds by banks.
Effects of Decree 65
With Decree 65, the markets in coming times will progress in both directions. The strict tightening on professional investors will help reduce non-specialized investors from coming forth to invest in corporate bonds. But this will lead to two other consequences for both investors and issuers. If individual investors are not allowed to invest in corporate bonds, they will be drawn to riskier investment channels.
The Chainalysis Global Cryptocurrency Acceptance Index Survey shows that Vietnam entered the top ten in 2020, and held the top spot in last year's list, while this year was identified as the leading country in using virtual currency. However, Vietnam’s virtual currency is not legal money. When retail investors are restricted from investing in bonds, they may transfer money to investment channels such as virtual currency, international stock exchanges, multi-level finance, and forex.
On the side of issuers like banks, in the event of running out of credit room, it can cause businesses to struggle to find money sources, and they may have to sell off liquid assets such as stocks or pledge stocks to balance short-term capital for the purpose of refinancing. This can have a negative effect on the stock market. In fact, in the first trading session after Decree 65, the VN Index dropped 28.6 points due to concerns about money source for bonds.
After Decree 65, public attention has focused on real estate enterprises. The real estate market has been very gloomy in recent times, making the money to sell real estate projects very limited and potentially risky. According to FiinGroup, the financial health of real estate companies in general is still relatively good, except for companies set up for the sole purpose of raising capital through bank loans. However, FiinGroup is more concerned about the pressure to repay bonds before maturity date in the next two or three years by real estate enterprises. At the same time there is liquidity risks for distribution agents that commit to buy back bonds, which are financial institutions, securities companies and banks.