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Thursday, June 20, 2024

Time for debt restructuring

By Thuy Le

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One of the greatest concerns at the moment is the “time bomb” called corporate bonds, which may also affect the credit quality of the banking system. With a considerable volume of corporate bonds falling due in the rest of this year, what should banks do if issuing organizations fail to pay principal and interest on time?

Urgent solutions

Prime Minister Pham Minh Chinh held a meeting on April 22 with the State Bank of Vietnam (SBV), the Ministry of Finance and the Ministry of Justice over the immediate issuance of two vital circulars: one on guidelines for restructuring and rescheduling debt and keeping debt classification unchanged, and the other on revision of several articles of Circular 16/2021/TT-NHNN with provisions on the trading of corporate bonds by local banks and foreign bank branches.

On April 23, a day after the meeting, these two circulars were signed by the SBV governor and took effect from April 24. The fact that the central bank responded to the prime minister’s request right away is a testament to the necessity and urgency of those solutions provided in these two circulars to remove the woes the business community is grappling with.

As the economy displays signs of slowing, enterprises have had to scale down their operations due to poor cash flows and even the risk of bankruptcy. Their ability to repay debt is all the more uncertain. Therefore, the risk of their debt turning sour is high. Data from the General Statistics Office showed that 60,200 companies pulled out of the market in the first three months of the year, up 17.4% over the same period last year, equivalent to 42% of the total number of firms going bust in 2022, which was 143,200.

The dire situation in which many enterprises are now in has been much talked about. The two-year-long fight against the Covid-19 pandemic has almost exhausted all the resources of most businesses. They have had trouble with broken supply chains, evident in a chronic shortage of input materials and a surge in prices. Fewer export orders, soaring financial costs and workforce crises have also put businesses on edge. For this reason, adopting policies for supporting the business community through debt restructuring, for example, is more urgent than ever.

This is the second time in three years the SBV has allowed banks to restructure debt payment and keep debt classification unchanged for certain borrowers for up to 12 months via the issuance of Circular 02/2023/TT-NHNN. Previously, the debt restructuring policy was adopted during the height of the pandemic and ended in late June 2022, helping banks and their corporate clients temporarily ride out the hardships.

The central bank also published Circular 03/2023/TT-NHNN aimed at improving liquidity, removing difficulties, and promoting the development of the corporate bond market in the current situation, according to the policy of the Government and the instruction of the prime minister. With this circular in place, credit institutions may immediately buy back unlisted or unregistered bonds on the UPCoM.

After Decree 08/2023/ND-CP was issued in March to create a legal corridor for debt restructuring for bond issuers, the above two circulars are expected to aid businesses and the banking system as well.

New policy approach

The risk of bad debt rising stems from not only businesses which have narrowed down their operations but also individual customers. Outstanding consumer loans at banks and finance companies have grown sharply. High interest rates have piled huge pressure on individual borrowers.

Therefore, Circular 02/2023 expands the list of entities subject to debt restructuring. Individual customers who are having a hard time paying off their consumer loans also benefit from the circular.

On April 23, the Government issued Resolution 59 providing solutions for removing the difficulties for customers with consumer loans and other personal loans, based on the recommendations of the central bank. Specifically, the Government asked the SBV to consider and soon bring into force a circular with effective solutions for this group of borrowers in a transparent and proper manner.

In addition, one of the greatest concerns at the moment is the “time bomb” called corporate bonds, which may also affect the credit quality of the banking system. Though businesses have been stepping up the buyback of the bonds they issued prematurely, the volume of corporate bonds falling due in the rest of this year is considerable. What should banks do if these bond issuers fail to pay principal and interest on time?

Based on available information, VIS Rating estimated the percentage of bad debt from outstanding corporate bonds has risen to nearly 10% as of March 2023 from 1.2% in late September 2022. The company also predicted that some VND113 trillion worth of corporate bonds would reach their maturity between the second and the fourth quarters of 2023 and are at risk of failing to meet payment obligations. Meanwhile, according to data from the Ministry of Finance, in the first quarter of 2023, 69 corporate bond issuers delayed principal and interest payments totaling about VND19.2 trillion. Among these, 23 issuers have plans to negotiate with bondholders over VND9.6 trillion worth of corporate bonds, or 50% of the volume with late payments.

Once corporate clients who have borrowed money from a bank and have sold their bonds to the same credit institution or offered to other investors fail to pay principal and interest on corporate bonds upon maturity, it is a signal that these businesses are having trouble with their cash flows and solvency. In that case, the loans they arranged at banks are at risk of becoming bad, leaving lenders with no choice but to alter debt classification when carrying out quantitative/quantitative reviews.

Therefore, the early introduction of certain regulations that allow banks to restructure debt and keep debt classification intact for their struggling customers and to buy back those corporate bonds previously sold will help prevent loans from turning bad at banks. In addition, the buyback of bonds will help banks secure a better position and place individual bondholders under extra pressure during talks over debt restructuring and the option of debt payment to corporate bond issuers in the form of other assets.

The State Bank of Vietnam’s Circular 03/2023/TT-NHNN suspends the enforcement of Clause 11, Article 4, Circular 16/2021 on sale and purchase of corporate bonds by commercial banks, with effect until the end of 2023. 

As per the regulations applicable since 2021, banks could only purchase unlisted corporate bonds 12 months after such bonds were sold and could only buy back the bonds they had earlier sold. The SBV has put this provision on hold, meaning banks can now buy back unlisted or unregistered bonds on the UPCoM immediately, provided that bond purchasers had paid them in full when their contracts were signed. Along with that, bond issuers must be rated at the highest level based on banks’ internal credit rating system.

The State Bank of Vietnam’s Circular 02/2023/TT-NHNN stipulates that local banks and foreign bank branches may reschedule debt payments and keep debt classification unchanged to support corporate customers in difficulty and individual clients having a hard time paying off their consumer loans. This circular will come into force until June 30, 2024. Debt subject to such treatment includes loans and financial leases. The new payment period is to be determined by banks but shall not exceed 12 months from the original due date. After restructuring, banks will have to make risk provisions following a certain roadmap. Additional provisions for rescheduled debt will be made in two stages: at least 50% by December 31, 2023, and 100% by the end of 2024. 

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