Leverage ratio tightened: what bond investors should be concerned about

The National Assembly passed the Amended Enterprise Law 2025, introducing a new leverage cap for non-public companies issuing private placement bonds. Effective July 1, 2025, these bond issuers must maintain a liability-to-equity ratio no greater than 5x to issue private placement bonds. This aligns the regulatory framework for non-public companies with that of public companies under Securities Law 2024.

New regulations on bond issuance

Yesterday, the 15th National Assembly enacted the revised Enterprise Law, which includes new laws on beneficial ownership disclosure and tightens corporate bond issuing procedures, with 455 of 457 deputies voting in support.

One important modification to this amended law is the inclusion of regulations relating to an enterprise's 'beneficial owner', which are designed to strengthen anti-money laundering efforts. While supporting the broad principle, the government emphasised that businesses established prior to the law's enforcement will not be required to submit ownership information immediately.

To address concerns regarding the regulation of private corporate bond issuance, particularly by non-public enterprises, the government will keep the debt-to-equity ratio limit of five times, as initially specified in the draft. The National Assembly Standing Committee approved this resolution to strengthen financial discipline and lower default risk for issuers and investors.

While some NA members proposed delegating bond issuance criteria to executive decrees, the government insisted on keeping such standards in the law to encourage transparency and accountability.

The government also noted that the policy does not apply to state-owned enterprises, real estate developers, credit institutions, insurers, reinsurers, securities firms, or fund management companies, all of which are subject to sector-specific regulations. The report given to the National Assembly includes detailed implementation directions.

To improve openness and modify the regulatory approach, the law delegated responsibilities for enterprise registration and the development of transparent inspection procedures to people's committees. This contributes to the government's objective to stimulate private sector development by shifting from pre-licensing checks to post-establishment surveillance.

What to note for investors?

Mr. Nguyen Dinh Duy, CFA, Director - Senior Analyst at VIS Ratings do not expect the new leverage cap to materially constrain bond issuance activity. Because historical data shows that only about 25% of non-public issuers over the past three years had leverage exceeding 5x or negative equity.

" While elevated leverage is a key credit risk for lower-rated issuers, our analysis of 182 defaulted issuers reveals that weak cash flow and poor liquidity management—not excessive leverage—were the primary drivers of default," said Nguyen Dinh Duy and his colleagues.

According to the VIS rating, fewer than a quarter of these issuers had leverage above 5x or negative equity, while the average ratio for the rest was 2.8x. Despite moderate leverage, 90% of defaulters struggled to generate sufficient operating cash flow to meet coupon payments or lacked liquidity to repay or refinance maturing principal.

Nearly 40% of defaulted bonds had tenors of just 1–3 years, with proceeds often used to fund long-gestation projects that failed to produce timely cash flows.

Without stable internal cash generation, issuers relied heavily on refinancing. Consequently, 85% of defaults occurred within the first three years of issuance. Moreover, around 40% of defaulted bonds were backed by collateral that proved difficult to value or liquidate, such as property-related receivables, business cooperation contracts, and future project income rights. The absence of a robust debt restructuring framework and limited legal recourse further exacerbated default rates.

Going forward, in Mr. Nguyen Dinh Duy’s opinion, investors must look beyond headline leverage when buying corporate bonds. Investors will require a more comprehensive assessment—one that considers the strategic intent behind the bond issuance, the issuer’s capacity to generate sustainable cash flows, and the extent to which repayment risks are mitigated through robust collateral or credible third-party guarantees.

VIS Ratings recommends that investors must evaluate not just issuer-level credit risk but also the specific risks embedded in individual debt instruments. These include structural features such as seniority, collateral backing, and legal covenants.

“Unlike issuer ratings, which reflect overall creditworthiness, bond ratings capture the distinct terms and protections of each bond instrument, providing a more accurate gauge of default risk. This granular analysis enables investors to make better-informed decisions, aligned with the risk profile of each bond”, said VIS ratings.