Challenges in converting bonds to real estate

Allowing bondholders to receive principle and interest payments from assets such as real estate is totally acceptable.

Only one successful private placement of bonds by Son Kim Real Estate Joint Stock Company was registered in the real estate market in the first two months of 2023, with a total issuance value of up to VND 500 billion. The interest rate on this batch of bonds is 13.5% per year, and bondholders are paid interest every six months. Furthermore, there are roughly VND 205,000 billion in maturing debts, of which VND 104,000 billion are real estate company bonds.

The Hanoi Stock Exchange (HNX) has published a list of issuers that have postponed principal and interest payments from September 16, 2022, to January 31, 2023. The list includes 54 businesses, including 34 real estate and construction firms.

Decree No. 08/2023/ND-CP establishes the particular requirements for swapping debt for real estate, which will serve as the legal foundation to simplify the treatment of bad debts in corporate bonds, offering bondholders additional alternatives. But it is not solely up to firms to use assets to repay debts; they must also negotiate with bondholders.

Businesses must demonstrate the asset's desirability to bondholders in order to persuade them to agree. Businesses will still have to repay the debt in cash if bondholders do not approve. To convince bondholders to agree, the issuer must evaluate how to price the asset. Dealing with thousands of bondholders who have various requirements and decisions is difficult, so obtaining a suitable price may be difficult.

It might be difficult to appropriately value real estate in order to repay debt to bondholders. Property valuation entails technical criteria, the actual state of the property, and market values. The market price is affected by factors such as the property's location and market circumstances at the time of appraisal, which might be determined by the state's land price bracket, the project's primary asking price plus incentives, or the price per unit established by a professional appraiser.

Dr. Nguyen Van Dinh, Chairman of the Vietnam Real Estate Brokers Association, said that swapping bonds with real estate will create opportunities for creditors to actively choose and own houses at an agreed-upon price. Once the price is approved, the issuer will no longer have a debt obligation, but bondholders will still face the risk of asset devaluation or legal issues related to the property.

There are specific risks associated with co-owning real estate with other investors or having to spend additional money to own the property separately due to small investment amounts. There's also the risk that the issuer will increase real estate prices to offset debt. Therefore, bondholders need to determine the price of the swapped property and agree on fees when carrying out conversion procedures. Most importantly, there should be negotiation between the enterprise and the bondholder and a careful examination of the project's legality.