Amidst the turmoil in Vietnamese bond market, which has not showed any sight of improvement, the Government continues to change the legal framework around Vietnamese corporate bonds. The latest regulations are the regulations by the Vietnam Security Depository Corporation (VSDC) on registration, depository, settlement and implement of rights for private corporate bond (VSD Private Bond Regulations). In light of the new VSD Private Bond Regulations and the difficulties for current bond holders to enforce their rights under the terms and conditions of bonds issued earlier (standard terms), it is high time that the terms and conditions of private corporate bonds to be drafted differently to give better protection to bond holders. We discuss below some of the improvements which could be included in the terms and conditions of a new private corporate bond:

· Individual vs collective rights: under standard terms, most of the rights of bondholders are exercised collectively through the meeting of bondholders and/or the various agents (e.g., bondholders representative, security agents, or registration agents). While collective exercise of rights may be convenient for the issuer, collective exercise of rights could make it difficult for individual or small bondholders to protect their rights since they depend on decision of the meeting of bondholders and actions of the relevant agents. Therefore, we think that except for some mandatory rights, the terms of private corporate bond should allow a bondholder to exercise its right individually as much as possible. Under Decree 153/2020, change to the bond terms, approval of remedial plan regarding a breach by the bond issuer, or change to the bondholders’ representative require approval by the bondholders holding at least 65% of the outstanding bonds.

· Reducing or removing the agents: Usually, standard terms employ various agents (e.g., bondholders representative, security agents, or registration agents) for the operation of a private corporate bond. However, the agents, who are selected and paid by the bond issuer and are not subject to any clear fiduciary duty to the bondholders, suffer from inherent conflict of interests and may not be helpful to the bondholders if the bond issuer defaults. For private corporate bond, only a bondholders representative (đại diện người sở hữu trái phiếu) is required if there is individual bondholders. There is no requirement for a security agent. And given the new VSD Private Bond Regulations, there is no need for a registration agent. Accordingly, a private corporate bond could do away with the various agents if the bondholders are limited to institutional bondholders only.

· Dealing with VSDC: Under VSD Private Bond Regulations, the VSDC only works with the bond issuer (not with representatives of bondholders) to arrange for the exercise of rights of bondholders. Accordingly, there is an inherent risk that when the bond issuer is in default, it can refuse to cooperate with VSDC. In such case, the bondholders cannot exercise their rights via VSDC. Since the risk comes from the design of VSD Private Bond Regulations, one can only mitigate it by providing in the bond terms cases where bondholders could enforce their rights directly not through VSDC (e.g., when the bondholders do not deposit their bonds).

· Simple operation of bondholders meeting: Standard terms usually have elaborate provisions on the operation of a bondholders meeting similar to those of a shareholder meeting. However, complicated operation makes it difficult for bondholders to pass a decision. Accordingly, bond terms should be drafted to make it easy and flexible for the bondholder can pass a decision collectively.

This post is written by Nguyen Quang Vu.

Vietnam Business Law