Payment of bonds by "barter agreement": is it difficult or easy?

Illustration image: Đ.Minh

Enhance the agreement between enterprises and bondholders

According to Decree 08/2023/ND-CP amendments to and suspension of some articles of decrees prescribing private placement and trading of privately placed corporate bonds,

in case bond issuers face difficulties when making payments of bond principal and interests, they can use other legal assets of them to negotiate with investors to make payment by assets. It is based on the principle of complying with the provisions of civil law and relevant laws, with the investors' agreement, and must ensure the legality of the assets and the disclosure of information.

If this regulation is implemented, it will be an important solution to remove the deadlock for bond issuers, especially real estate enterprises, because many businesses face difficulties in cash flow when bonds come to maturity date.

According to securities expert Do Bao Ngoc, Deputy General Director of Kien Thiet Securities Joint Stock Company, by taking advantage of the existing assets of many issuers to put into the debt payment process for bondholders, this new decision would create a legal framework for the parties to have the opportunity to negotiate and come to an agreement on a new debt payment plan which is appropriated with the difficult financial situation of many issuers.

From the perspective of bondholders, receiving other assets, possibly real estate, is also an option that can be considered in the condition that they do not accept the debt extension conditions of the issuer.

Expert Can Van Luc said that the volume of corporate bonds that reach the maturity date in 2023 is about VND 200,000 billion. In particular, up to VND 120,000 billion are real estate bonds. This provision of Decree 08/ND-CP creates a legal basis along with basic instructions to ensure a clearer and more consistent implementation of the bond-for-asset negotiation, minimizing the risk of disputes.

Commenting on the regulation on making payments of bond principal and interests by using other legal assets, lawyer Nguyen Thanh Ha, Chairman of SBLaw, said that this was a temporary solution to save the business. "The regulation clearly states that bond principal and interest can be paid with other assets, but it must comply with the provisions of the Civil Law and relevant laws, especially with the approval of the bondholder. Thus, this regulation promotes the agreement between the enterprise and the bondholders. If these investors do not agree, the enterprises are still forced to make payment following the previous agreement. Regulations on making payments of bond principal and interests using other legal assets would help the corporate bond market reduce debt repayment pressure and the supply of bonds in the market, thereby reducing the probability of a sell-off", Lawyer Nguyen Thanh Ha said.

The "barter" method needs to be transparent

Around the concerns that allowing swaps of bonds with assets will create a bad precedent when enterprises are free to issue bonds when real estate products cannot be sold, they will repay bondholders by converting to other assets, lawyer Nguyen Thanh Ha said that this was not worrisome, because if they do, it will be difficult for them to get approval from bondholders. Besides that, in the current period, many enterprises operating businesses seriously face difficulties due to being stuck in cash flow rather than making mistakes. Thus, if there were no solutions to remove difficulties, enterprises could go bankrupt unexpectedly.

However, implementing this solution in practice is not easy. According to Mr Do Bao Ngoc, implementing this solution may be difficult, and it is hard to reach a consensus if the issuer offers an asset valuation at a high price much higher than the transaction price of the market before the issuance of Decree 08/ND-CP. Some enterprises may even regulate the ratio of converting bonded debt to pay with other assets is only 50% or 70%. It means that if investors accept the payment plan of other assets, they may have to pay extra cash to receive the asset, which may be valued at a very high rate. This leads to the fact that investors suffer a lot, which is the biggest problem in using real estate assets to swap for making payment of a bonded debt by cash. "To solve this problem, it required to have an objective intermediary valuation organization to participate in the valuation of assets used for swapping between the issuer and the bondholder, to ensure the fairness and benefits of both sides", Mr. Ngoc suggested.

According to lawyer Nguyen Thanh Ha, this regulation also has potential risks for bondholders because making payments by using other assets needs to be regulated more transparently and clearly for each type of bond as well as clarification on payment time, form of conversion from bonds to assets, etc. According to economist Dinh Trong Thinh, whether the negotiation is successful or not depends on many issues about the legality of the assets, the disclosure process and the ability to pay. If bondholders are settled with another asset, what is that asset's legal status and conversion price? This is the key issue. If the two parties cannot reach an agreement, the issuer must have a plan to ensure the handling of financial obligations.

Many opinions argue that, to really create positive changes in making payment of bonds when they become due, the issuers must have goodwill and are serious in negotiating with bondholders. It must be an open and transparent negotiation to get a plan to swap assets at market prices, ensuring the legitimate interests of bondholders. It is also necessary to have the sharing, companionship and goodwill of investors in sharing difficulties with the issuer as well as the timely support and problem-solving of the regulatory agencies to help both sides find common ground.