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Monday, July 15, 2024

Still on a mountain of debt

By V. Dung

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The Government’s Decree 08 and Resolution 33 have given a much-needed lifeline to cash-strapped real estate firms as the bonds they issued would fall due soon. However, analysts see the decree and resolution as a temporary solution, as bond issuers are still sitting on a mountain of debt.

Due to debt issuers’ over-diversified investments and overuse of financial leverage, the situation has remained tense for real estate companies. Bondholders have piled the pressure on them since the end of last year. That, coupled with difficult access to bank credit and poor real estate market liquidity, has made it impossible for real estate developers to address the issue alone.

Trapped in a crippling debt spiral, a situation with almost no way out, most real estate businesses are awaiting the Government’s further help to get out of financial distress. Recently, the Government has issued new regulations, easing the pressure from bonds, loans and high interest rates.

Decree 08 enables debt-issuing organizations to renegotiate bond terms and conditions with bondholders, especially the date of maturity. Before the decree came into effect, some bond issuers had attempted to talk to buyers about bond terms, but their discussions had not come to fruition as the current legal framework does not permit a coupon payment extension. The decree also enables issuers to swap debt for assets provided that they secure prior approval from at least 65% of bondholders.

Meanwhile, Resolution 33 enables debt rescheduling and restructuring for cash-strapped companies.

According to Securities firm VNDirect, the resolution ensures the interests of individual bondholders will not be affected and that bond buyers and sellers will be able to work together to come up with coping solutions.

To get the nod from bondholders, debt-issuing companies may hike their coupon rates. Decree 08 and Resolution 33 may intervene to improve market liquidity in the short term. But they cannot tackle the underlying problems of the housing market, which are red tape, difficulties in fundraising, and homebuyer caution.

“Thus, there should be a policy helping capital flow into the real estate sector in the next three to six months and streamlining procedures for construction projects,” the securities firm said in its report.

The real estate market is seeing the 2011-2013 crisis repeating itself, so an impetus is needed for the market to bounce back. In 2013, when Vietnam’s real estate bubble burst, the National Assembly revised the land law and launched a stimulus package totaling VND30 trillion with annual interest rates ranging from five to six percent, targeting buyers of social homes, which encouraged locals to take out home loans.

In addition to the decree and resolution, the State Bank of Vietnam (SBV) has slashed interest rates and launched a credit package for affordable homes, signaling that the SBV has begun to ease its monetary policy. However, these regulatory moves may take time to produce results.

Le Hoang Chau, chairman of the HCMC Real Estate Association, said that through its recent moves, especially Resolution 33, the Government sympathized with the hardships faced by the real estate firms.

“Determining what caused the market to fail is crucial to cushion negative impacts. The resolution has laid the groundwork for restructuring corporate bonds and lowering interest rates. Businesses should do their best to get out of the woods,” he added.

A costly exit

The new legal documents issued by the Government have kept businesses from plunging further into debt. It is too early to tell these bond issuers could solve the debt problem soon.

According to experts, the provisions of Decree 08 are what bond issuers have expected as almost all of their recommendations have been factored into the decree. However, it makes no mention of investor interests.

The decree does not deal with the thornier problem faced by the bond market –investor confidence in corporate bonds which were issued via private placement, which have fallen due or will become due or which have yet to be issued.

VNDirect said debt-for-asset swaps would help issuers become more flexible in terms of debt repayment, especially real estate firms, bolstering their efforts to accelerate work on their projects or selling houses at a discount to bondholders.

Whether or not such swaps will receive approval from bondholders depends on the legality and valuation of the assets offered by debt-issuing organizations. In other words, businesses will have to sacrifice their future profits to settle their current debt.

Improving market liquidity requires companies to sell their assets at a discount, even though doing so would affect the value of their secured assets at banks. Thus, apart from debt-for-asset swaps, they may have to pay additional amounts to bondholders to keep their asset value from falling.

Although Decree 08 enables debt issuers to extend coupon payments by two years, they still need to win bondholder trust and approval. Meanwhile, in Resolution 33, the Government urges the Ministry of Finance to take measures to support businesses in restructuring their debts and payment terms, with priority given to financially strong real estate firms.

Beneficiaries might be businesses that have good projects and reasonable products or actively restructure debts.

Take Vietnam’s major property developer Novaland for example. It has resorted to share dilution to raise funds by issuing 975 million shares via private placement and selling another 1.95 billion shares to existing shareholders.

If the plan goes as expected, the firm would fetch at least VND29 trillion, increasing its chartered capital by 2.5-fold from around VND19.5 trillion to over VND48.7 trillion. The proceeds are planned to be used for debt restructuring and repayment, projects developed by its subsidiaries, and working capital increase.

According to financial experts, debt-for-asset swaps and bond repayment extension would ease the pressure on debt payment in the 2023-24 period. However, the pressure would intensify in 2025 and 2026 when huge volumes of bonds fall due. Thus, bond issuers should restructure their finances, form new business plans and liquidate their assets to accumulate enough capital to settle their debt in the future.

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