Corporate bonds following current law

Corporate bonds are a form of raising capital that we often meet in some businesses. However, nobody understands the legal provisions on issues related to corporate bonds. Therefore, this article will answer some of the issues related to corporate bonds according to the latest regulations of law.

Corporate bonds following current law

What are corporate bonds?

According to Clause 3, Article 4 of Law on Securities 2019, the concept of bonds is as follows:

“Bonds are securities that certify their holders’ lawful rights and interests to part of the debt of the issuer.”

According to Clause 1, Article 4 of Decree No. 153/2020/ND-CP dated December 31, 2020, the concept of corporate bonds is as follows:

“Corporate bond means a type of debt security with a term to maturity of at least 01 years, issued by an enterprise to confirm the bondholder’s legitimate rights and interests over a part of its debts.”

According to the above provisions, it is concluded that corporate bonds are a form of raising capital from enterprises with a term of 1 year or more. Businesses will issue their company’s bonds in the form of certificates or book entries to raise capital for the company, along with which holders of corporate bonds will become creditors of the business, and can establish lawful rights and interests in respect of the debt issued by the enterprise.

Features of corporate bonds

It can be said that understanding corporate bonds before starting to invest is one of the very important steps. This helps you understand the nature of corporate bonds and choose the ones according to your needs.

According to Article 6 of Decree No. 153/2020/ND-CP dated December 31, 2020 and Clause 4, Article 1 of Decree No. 65/2022/ND-CP dated September 16, 2022, corporate bonds will have the following features:

Types of corporate bonds

Based on many different types of subjects, there will be many classifications as names for each type of bond, and each type has its features and functions. According to Decree No.153/2020/ND-CP dated December 31, 2020 and Decree No 65/2022/ND-CP dated September 16, 2022, we have the following types of bonds:

• Green bond: a corporate bond issued to raise funds for environmental protection projects or projects that generate environmental benefits following the provisions of the Law on Environmental Protection.
• Convertible bond: a type of bond that is issued by a joint-stock company and can be converted into some common shares of the issuer under terms and provisions predetermined in the bond issuance plan.
• Secured bond: a type of bond whose principal and interest payments, when they become due, are entirely or partially secured by a specific asset of the issuer or a third party following law regulations on secured transactions, or guaranteed following regulations of law.
• Warrant-linked bond: a type of bond that is issued by a joint-stock company with warrants that entitle bondholders to buy a specific number of common shares of the issuer under terms and provisions predetermined in the bond issuance plan.

Subjects to be issued corporate bonds

According to Article 2 of Decree No. 153/2020/ND-CP dated December 31, 2020 and Articles 46, Article 74, and Article 111 of the Law on Enterprises 2020, subjects to corporate bonds issuance include:

• Multi-member limited liability companies
• Single-member limited liability companies
• Joint stock companies

In addition, the above subjects must be established and operating under the law of Vietnam.

Why are bonds preferred by enterprises to raise capital instead of choosing banks?

Raising capital is very necessary and important to maintain and develop an enterprise. Enterprises have the legal right to borrow from banks to ensure an optimal amount of capital, but now, we can see that bond issuance is preferred by enterprises instead of bank loans. The following basic reasons:

Firstly, the process is simple and cost-effective.

Bank loans are not flexible in operating their enterprises. Because the bank always makes “covenants” (rules) about the loan. In addition, the procedure and process for a bank loan is complicated with many steps, so time-consuming and costly. While bonds are simple in procedures, and not too dependent on any subjects, they are flexible in raising capital.

Secondly, enterprises can use capital freely.

When enterprises issue bonds instead of loan banks, bondholders put no restrictions on the terms of the agreement. Enterprises make rules about the value and terms of bonds. In addition, the bond market tends to have fewer rules than the bank. Therefore, enterprises issue bonds priority so that they can have capital and freely spend according to their needs.

Advantages and disadvantages of issuing bonds

Issuing bonds will bring the following benefits:

• Increase the rate of profits on capital of the enterprise owners

If the company makes profits using capital from issuing bonds, the profits on capital of the enterprise owners will increase. This is because the issuing of bonds does not change the stock quantity, so more profits are divided by the enterprise owners.

• Interest expense on bonds is tax abatement

Interest expense on bonds is tax abatement, so the enterprises can reduce company income tax by issuing bonds. While issuing stocks, any profits paid to stockholders are taxable. While issuing stocks, any profits paid to stockholders are taxable.

• Protecting stockholders

When the group of stockholders does not want their ownership interest to be reduced by selling stocks to new investors, they will promote issuing bonds. Because bonds are a form of debt, no new stocks will be issued. However, this is not the case where bonds are converted into common stocks by the issuer. Bonds with this feature are called convertible bonds and can reduce stockholders’ ownership interest.

• Less bank intervention

Enterprises directly issue bonds to investors, so there is no third party. For example, the bank may increase the loan interest rate or impose rules for enterprises. Therefore, if an enterprise is large enough to be able to issue bonds, this is a significant benefit over trying to get a loan from the bank.

• Trade for better rates

If after issuing bonds, the interest rate decreases, enterprises can buy back the bonds and replace them with lower-priced bonds. This allows businesses to reduce their financial costs.

In addition to the benefits that bond brings, enterprises also have to suffer certain disadvantages:

• Regular periodic interest payments to bondholders. Although the interest rate can be fixed, it is common to have to pay interest even if the enterprises make a loss;
• If the company’s profits decrease, the value of the company’s stocks may decrease. This is because the bond interest payments take priority over dividends;
• Easy to influence by bondholders: they can impose certain covenants/commitments on the business and financial activities of the business to limit risks;
• Changing terms and conditions or waivers made with bondholders can be more difficult than dealing with a bank;
• Different listing rules must be followed. Significant is the provision on the obligation to publicly disclose corporate information at the time issued bonds and throughout the term of the bonds;

The new regulations on corporate bonds

Recently, the Government issued Decree No. 08/2023/ND-CP, effective from March 5, 2023, amendments to and suspension of some articles of decrees prescribing private placement and trading of privately placed corporate bonds in the domestic market and offering of corporate bonds in the international market, as follows:

• Regulations on payment of bond principal and interests with other assets

According to Clause 3, Article 34 of Decree No. 153/2020/ND-CP, bond issuers must pay full and timely payments of bond principal and interests when they become due, and exercise associated rights (if any) for bondholders under terms and conditions of bonds. This is a general rule, regardless of the bond offering in the domestic market or the international market.

However, Article 1 of Decree 08/2023/ND-CP has added the following provisions:

“In case of the offering of bonds in the domestic market where the issuer is unable to make full and timely payment of bond principal/interests in VND according to the issuance plan disclosed to investors as prescribed in Article 17 of this Decree, the issuer may reach an agreement with bondholders on payment of bond principal/interests using assets as follows:

• The payment must comply with the regulations of the civil code and relevant laws. In the case of conditional business lines, the payment must also comply with regulations of law governing such conditional business lines.
• The payment must be made with the consent of bondholders.
• The issuer shall make ad hoc information disclosure and assume the full responsibility for the legal status of assets used for paying bond principal/interests following regulations of law.”

Regulations allow bond issuers to negotiate with bondholders to extend the maturity of their bonds to a maximum of 2 years. Therefore, enterprises can extend the bond repayment term when facing financial difficulties.

• Regulations on professional securities investors and credit ratings are suspended