To contribute to reducing difficulties in production and business activities of enterprises in 2023, the Government has decided to remove the regulation restricting credit institutions from buying sold corporate bonds for a definite time. Particularly, the State Bank of Vietnam has recently eased some regulations related to corporate bonds unlisted on the securities market or unregistered on Upcom trading system (“unlisted corporate bonds”) of credit institutions and branches of foreign banks (“credit institutions”)
On April 23, 2023, Circular No. 03/2023/TT-NHNN (“Circular 03”) was promulgated with immediate effect from the following day until December 31 of 2023, suspending the validity of Clause 11 of Article 4 of Circular No. 16/2021/TT-NHNN on corporate bond trading of credit institutions and branches of foreign banks (“Circular 16”) .
Previously, under Clause 11 of Article 4 of Circular 16, credit institutions were only permitted to buy their sold unlisted corporate bonds and/or unlisted corporate bonds issued in the same batch/period as the sold unlisted corporate bonds after 12 months had passed since the date on which the credit institutions sell the bonds. Circular 03’s suspension of this clause now permits credit institutions to repurchase their sold unlisted corporate bonds right away. In other words, until the end of this year, the 12-month restriction prohibiting credit institutions from repurchasing their sold unlisted corporate bonds has been temporarily abolished. The same as under Circular 16, the following requirements must be completed for any such repurchase to take place :
a) All other requirements under Article 4 of Circular 16 must be met;
b) The buyer of the corporate bonds from the credit institution must settle all corporate bond purchase expenses when the credit institution signs a contract for selling corporate bonds to the buyer;
c) The issuer is at the highest rating according to the latest internal credit rating system prior to the date on which the credit institution purchases its corporate bonds.
One of the most significant benefits is the flexibility that it affords these institutions. By having the ability to repurchase bonds at any time, credit institutions can better manage their balance sheet and optimize their capital structure. Especially for businesses that are bond investors, being able to resell bonds previously purchased from the same credit institution is also a capital support channel for these businesses when they have debt restructuring and helps to remove the cash flow bottleneck of corporate bonds in the current period. Accordingly, this measure also contributes to supporting the recovery, continuing to maintain production, business, investment, and consumption, and at the same time, promoting economic growth in 2023 and the following years in the context of the world, and Vietnam still has many changes and difficulties.
However, it can also be seen that the conditions in Circular 16 will still limit most of the volume of corporate bonds that credit institutions can buy back. Specifically, corporate bonds that are redeemed must still meet rigorous criteria according to Article 4 of Circular 16, such as The previous sale must be an actual money settlement; the highest level of internal credit rating (Issuers) is challenging, as businesses rated at this level usually have a strong financial position and applying this will be very difficult for the remaining issuers to meet.
Accordingly, the bonds subject to the provisions of Circular 03 are limited to the group of corporate bonds that the bank has previously held and then sold to the market. In other words, bond investors benefiting from the new policy only include investors who bought bonds from previously sold banks and now need to sell them back to the same bank to raise funds for the capital movement.
Additionally, credit institutions, especially banks, have significant influence over the corporate bond market, acting as investors, financial intermediaries, and bond issuers. With that fact, previously, many investors and banks believe that the restriction under Clause 11 of Article 4 of Circular 16 has significantly limited banks in participating in trading corporate bonds. Therefore, allowing credit institutions to repurchase their corporate bonds at any time, rather than waiting for a mandatory 12-month period, can provide several advantages that are both practical and beneficial.
To conclude, allowing credit institutions to repurchase their corporate bonds at any time provides significant advantages that can increase flexibility, improve liquidity, enhance risk management, and ultimately, foster investor confidence. However, the beneficiaries of this new policy include only corporate bonds that the bank had previously held, then sold to the market, and bond investors benefited from the new policy only includes investors who have bought bonds from once-sold banks and now want to sell them to the same banks to raise their capital.
*Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.
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For further information, please contact:
Vu Thanh Minh, Partner, LNT & Partners
minh.vu@lntpartners.com
