In expressing his concerns about the corporate bond market, even when Decree 65/2022 on offering and transacting corporate bonds issued via private placement is in full enforcement, Dr. Le Dat Chi, Dean of the Finance Faculty at the University of Economics HCMC, asserts that if the key problems are not properly solved, greater consequences would be unavoidable.

Identifying the magic wand The Saigon Times: At a meeting in late November, the Ministry of Finance asserted its viewpoint over the full enactment of Decree 65/2022, under which regulations on professional investors, credit ratings for bond issuers, and shorter periods for bond distribution in each issue will apply from January 1, 2024 after being put on hold under Decree 08/2023. What are your points on this issue? - Dr. Le Dat Chi: First, it is necessary to pinpoint inadequacies on the corporate bond market in recent times. These include scant management of dossiers on corporate bond issues by the State Securities Commission or the Stock Exchange. The Stock Exchange only offers a template, caring little about what enterprises will do with bond issues. It is no wonder why a certain enterprise with charter capital of billions of Vietnam dong could issue bonds worth trillions of dong; why a newly-established company could issue huge lots of bonds worth trillions; and how businesses wrongly used proceeds from bond issues. Such inadequacies had not been thoroughly studied by the Ministry of Finance for curative measures, which means such irregularities can repeat themselves in the future, with harsher consequences to the economy than what have occurred in the past. How do you comment on the Finance Ministry’s viewpoint when pushing for the full enactment of Decree 65/2022? - Under the current circumstances, does the Finance Ministry think the magic wand to address all such inadequacies is to make credit ratings mandatory for all enterprises? Is the absence of an intermediary risk assessment agency the key reason behind such problems? That would be a huge mistake if one believes it that way. Before Evergrande became insolvent, China’s leading credit rating company Dagong had given the thumbs-up to this real estate giant. Finally, only Dagong was suspended for one year, while no one else was held accountable, despite the excessive devastation to the Chinese economy. Another issue is that since a decree on corporate bonds issued through private placement, it has always been required that enterprises must undergo credit ratings procedures on their own, but none have done so. Therefore, making credit ratings mandatory will only benefit credit ratings firms, instead of addressing market problems. Regarding the regulation determining an investor’s professionalism: When corporate bonds are issued, certain primary investors will acquire huge amounts of bonds issued via private placement for retailing to secondary investors, who as professional investors will be responsible for their own decisions to buy bonds from primary investors. It should be noted that primary investors, who are mostly banks and securities companies, will seek to lure bond buyers as secondary investors. The question is whether the primary investors will also be held responsible if the bonds they sell to secondary investors turn out to be junk papers, no matter whether the secondary investors are professional one or not. The decree does not specify this issue, but seems to give a hint that secondary investors are responsible for their own decisions. This approach seems illogical, because bonds are issued to mobilize funds from the general public, regardless of the investor’s professionalism, and the protection of buyers must prevail over that of issuers. The supervision of transactions, from listings of bonds to the disclosure of issuers’ information must be done, instead of requiring investors to be professional ones. It should be noted that the law does not ban an enterprise from borrowing funds from individuals or entities, and interest on such borrowings is still treated in accounting as interest on bank loans or corporate bonds. So what is the difference between borrowing on a contractual basis and borrowing via bond issues? There should be no difference in this primary borrowing practice. The key issue rests with the secondary round, i.e. the transfer of debts. For example, if a bank lends to an enterprise, this outstanding loan is not freely transferred. But what if that very enterprise issues bonds to that bank, which will then sell the bonds to secondary investors? In doing so, the bank will lower its outstanding loan amount, and will seek to buy another lot of corporate bonds for retail, and the cycle will go on. That bank can freely engage in bond transactions without being held accountable, while secondary investors are regulated to be professional, and to account for their own decisions. Lately, banks selling corporate bonds to depositors or investors have been forced to buy back such valuable papers for misleading clients. If secondary investors are aware of such problems, it will be extremely difficult to mobilize funds from them; if they are not aware, there will be a crisis of confidence or grave consequences. Creating a fair playground Given the Finance Ministry’s standpoint, many real estate firms are worried that the full enforcement of Decree 65 will choke off the capital channel for them. Is there a solution that can ensure tight control over the bond market on one hand and maintain access to capital via bond issuance for the real estate sector on the other hand? - We all know that most of corporate bonds are acquired by banks, or with funds from banks. A request for a loan from a bank is not easily approved if it fails a risk assessment by the bank. Meanwhile, a decision to buy bonds, even low-grade bonds, can be quickly made by the bank. Therefore, the State Bank of Vietnam (SBV) has issued regulations on classifying such risks in banking activities to safeguard the interests of depositors, including stringent regulations requiring that bonds must be secured by collateral. If a real estate company issues quality bonds with collateral, banks and other investors will be ready to buy such papers. The problem is that such bonds are of low quality and fail to meet the risk appetite of investors. Therefore, it is SBV regulations that have been restrictive towards corporate bonds, not regulations from Decree 65/2022. Many people agree that to ensure healthy and stable development of the bond market, there must be tougher sanctions against lawbreakers besides the establishment of a full-fledged legal corridor aligned to international standards. What is your point about this? - As practiced, when primary investors sold corporate bonds to secondary investors, they created a new contract, instead of transferring the bonds on the basis of the original contract from the bond issuer, which was an offense by such primary investors. For primary investors which are banks, they have been forced to buy back bonds as they directly created concerns for depositors. To facilitate the transactions, Decree 65 as well as other regulations of the SBV have allowed commercial banks to buy back bonds that have been sold within 12 months, which helps protect secondary investors buying such debt from banks as primary investors. Meanwhile, securities companies, in order to better sell corporate bonds, have created new contracts and offered additional services to reassure secondary investors, with the commitment to buy back the bonds if bondholders meet certain preset conditions. This amount of corporate bonds is not sizeable, and these secondary investors are responsible for their transactions, meaning prevailing regulations have been preventive enough. The key issue now is to tighten control over the secondary market, from transparency on the part of issuing agencies to tighter management of transactions.