The Vietnamese government earlier this month officially promulgated Decree No.08/2023/ND-CP dated March 5 on amending, supplementing, and suspending articles of Decree No.65/2022/ND-CP from last September on offering and transacting corporate bonds in the domestic market and offering corporate bonds to international markets.

1. Prominent amendments on repaying bonds

1.1. For bonds issued in the domestic market, the issuing enterprise (“Bond Issuer”) is now permitted to negotiate with bondholders to repay the principal amounts and interests with other assets in the event that such Bond Issuers are unable to pay the principal amounts and interests when become due. The bond swap negotiation will be conducted with approval of bondholders and adhere to the relevant laws. In addition, the Bond Issuer has the responsibility to publish information. 

1.2. Bond terms can now be extended by a maximum period of two years from the original term of the existing bonds if the following requirements can be satisfied: 

1. it is approved by the authorized body of the issuing enterprise;
2. it is approved by the bondholders holding 65% or more of the total number of circulating bonds of the same class.

If the bondholders do not agree to the amendments to the bond’s terms and conditions, the Bond Issuers must negotiate with the objective of preserving the interests of the bondholders. If the negotiation fails, If the bondholders refuse to negotiate, the Bond Issuers must comply with its obligations in accordance with the terms and conditions of the existing bonds. This applies even if 65% of the bondholders agree to the amendments to the terms and conditions of the existing bonds). 

2. Feasibility of real estate bond swap 

With consideration given to the current state of the bond market and the real estate market, it can be ascertained that the Government’s promulgation of Decree 08 should be treated as a sign of assisting or “rescuing” real estate companies and corporations that are unable to repay the bonds when they become due, as well as the individuals and corporations that have bought real estate bonds. However, the practicality of the solution provided through Decree 08 must be considered, particularly with the following issues:

2.1. Legal risks associate with using real estate as bond repayment (especially off-plan real estate) 

FIRSTLY, typically, the real estate of the Bond Issues has been used as collateral can already be used as collateral; been an off-plan real estate in an off-plan housing project that has been mortgaged to raise capital for the construction of such project. 

As such, permission from the mortgagees before any transaction involving with the said real estate can be conducted, and other assets must be provided as replacement. 
If the said real estate involves with off-plan real estate, complication may arise as interests from multiple parties can be affected, such as the bond issuers, the mortgagee, the bondholders, etc. In addition, the repayment using off-plan real estate must comply with many laws and regulations associating with real estate and housing. In practice, many real estate projects from the Bond Issuers cannot satisfy such requirements. 

Additionally, bondholders mostly consist of banks and financial institutions. Article 132 of the Law on Financial Institutions, financial institutions which are defined to include banks and financial corporations must not engage in real estate business. Exceptions to the mentioned law includes possessing real estate as a result of debt settlement (however, real estate in this exception must be sold within 03 years). Comparing the said Article and Decree 08, the following issues must be considered:

1. whether the repayment of bonds by real estate can be considered as possessing real estate in accordance with the exception to Article 132, and
2. If financial institutions accept payment of bonds by real estate, the time period associated with the sale of the real estate must be considered. If the financial institutions do not or are unable to sell real estate received as repayment for bond in a reasonable timeframe, the authorities may consider the mentioned activities as engaging in real estate business, especially if such assets are sold for a considerable amount of profit in the future.

2.2. Difficulties associated with valuating real estate as bond repayment

The evaluation of real estate is another important issue when bondholders are given the right to receive real estate as bond repayment. 
Ordinarily, the bondholders must consider the feasibility of accepting real estate as bond repayment through the following steps: 

1. Step 1: Collecting necessary information to valuate the asset at the time of negotiation and acceptance, with consideration given to the project completion and hand over probability for Future Real Estate 
2. Step 2: Deliberating on the acceptance of repayment of bonds by real estate

For bondholders who are individual investors, valuation of real estate and off-plan real estate is a complicated process and insufficient information often prevents individual investors from accepting repayment of bonds by real estate. As such, Bond Issuers should not expect significant enthusiasm from individual investors.

In contrast, while banks and financial institutions should not encounter much issue in step 1, with the current state of the real estate market and the bond market, Bond Issuers should face difficulties obtaining acceptance from banks and financial institutions, for the project completion and hand over probability is relatively low (in turn reduce the value of the real estate significantly), which is the result of hindrance in real estate companies’ cash flow resulting in the inability to repay bonds in the first place. Even if acceptance from banks and financial institutions can be obtained, it is highly likely that they will require a considerable amount of real estate as repayment to compensate for the low value of the said real estate. 

FURTHERMORE, the inability to repay bonds is a sign of lack of liquidity from companies. Hence, the probability of completing real estate projects which involve Future Real Estate used as bond repayment is questionable. Moreover, Bond Issuers must continue their payment obligations to the bondholders refusing to accept this arrangement, which further affect the probability of completing real estate projects and in turn affect the interest of bondholders accepting this arrangement. 

3. Conclusion

The objective of Decree 08 is assisting companies with liquidity issues, particularly real estate companies and corporations and their inability to repay bonds. Although Decree 08 opens a legal path for companies and financial institutions to reorganize and restructure debts associating with bonds, practically the effect of Decree 08 should be minimal as repayment of bonds by real estate does not generate cash flows or assist companies to raise capital to continue with real estate projects. 

In addition, significant legal risks should prevent bondholders from accepting real estate as bond repayment instead of cash. Therefore, the promulgation of Decree 08 and the permission of extending the term of the existing bond for the maximum period of 02 years can be seen as an action from the Government to assist real estate companies until promulgation of the new Land Law which is expected to be in 2025.