One of the important and primary capital-raising channels currently being adopted by enterprises in Vietnam is the private placement of corporate bonds. This is an effective fundraising method that enhances the issuer’s initiative, diversifies investment methods in the market, and promotes economic development.
Unlike the method of public offering of corporate bonds, private placement of corporate bonds is not bound by strict legal regulations, complicated legal procedures, or a requirement to meet a certain number of investors. Therefore, the private placement of corporate bonds is one of the methods that enterprises prefer when they need capital for business development.
1. Definition of Private Placement of Corporate Bonds
We can view bonds as a debt relationship, reflecting the relationship between the borrower and the lender. Bonds are also a type of security that certifies the issuer’s debt obligations to the bondholder. When combining bonds with the act of issuing, the sale of bonds can be understood as the issuer offering bonds and selling them to investors who wish to purchase them. Among the various entities authorized to issue bonds, enterprises are the fundamental and essential group conducting this activity. This is considered an effective capital-raising channel for businesses alongside the traditional method of borrowing from credit institutions.
The process of an enterprise offering bonds can be carried out through one of two methods: public offering of corporate bonds and private placement of corporate bonds.
The private placement of corporate bonds is regulated by the Securities Law 2019 and various guiding documents and decrees, such as Decree No. 155/2020/ND-CP detailing the implementation of several articles of the Securities Law, and Decree No. 153/2020/ND-CP regulating the private offering and trading of corporate bonds in the domestic market and the offering of corporate bonds to the international market, amended and supplemented by Decree No. 65/2022/ND-CP dated 16/09/2022, and Decree No. 08/2023/ND-CP dated 05/03/2023.
2. Characteristics of Corporate Bonds
As a type of security, bonds have characteristics such as profitability, liquidity, and risk.
First, bonds are profitable, shown by the issuer’s commitment to pay bondholders a certain interest amount at a future date according to the bond’s terms. The profitability of bonds is the driving force for investors to purchase bonds and is the premise for the existence of bonds. Profitability also appears when bondholders trade bonds as an allowable asset.
Second, bonds have liquidity. Liquidity is understood as the ability to allow bondholders to sell bonds to receive a certain amount of money. Liquidity helps bondholders convert bond income into cash through secondary market transactions or banking operations. This feature attracts investors and satisfies their capital needs. The liquidity of bonds depends on factors such as the issuer, market fluctuations, state policies, etc.
Third, bonds carry risks. Similar to other investment tools in the financial market, bonds are both profitable but also carry certain risks. The issuer is responsible for informing investors of potential risks, and investors are advised to carefully consider before making any investment decisions. The profitability of bonds is shown by the potential future returns (when the bond matures or the issuer repays the bond in the case of early redemption). The risks of bonds simultaneously arise with market factors such as macroeconomic conditions (GDP growth risk, inflation, interest rates), legal changes, liquidity risks, etc.
3. Classification of Bonds
The classification of bonds plays a crucial role in understanding the characteristics and benefits of each type, thereby supporting strategic investment decisions. Bonds can be classified based on various criteria, here are some main classification criteria:
Based on the Issuer:
- Government Bonds: Issued by the Government of Vietnam to raise capital for public investment activities, budget expenditures, and public debt management. Government bonds typically have high liquidity and are considered one of the safest types of bonds with low risk.
- Local Government Bonds: Issued by local administrative units such as provinces, centrally-run cities, districts, communes, and towns. This is one of the funding sources for local governments to invest in infrastructure development projects, public services, and other local needs.
- Corporate Bonds: Evidence of debt issued by the corporation to the bondholders. When needing capital for investment, expanding business operations, corporations issue bonds. Corporate bonds are issued by joint-stock companies and limited liability companies. According to the Enterprise Law 2014, limited liability companies are not allowed to issue bonds in certain cases, and the Enterprise Law 2020, effective from 01/01/2021, retains these regulations.
Based on Form of Expression:
- Bearer Bonds: A type of bond where the bondholder’s name is not disclosed. This means that the identity of the bondholder is kept confidential. Bearer bonds are often issued by companies or organizations that require high confidentiality for their financial transactions.
- Registered Bonds: A type of bond where information about the bondholder is recorded and stored by the issuing company. This means that the name and contact information of the bondholder are registered in the company’s records, and the issuing company is responsible for managing and maintaining this information. Registration can be for the principal, entirely or both principal and interest.
- Book-Entry Bonds: Bonds that do not have a physical form, with ownership confirmed by maintaining the bondholder’s name and address in an electronic database system.
4. Methods of Private Placement of Corporate Bonds
Enterprises can carry out private placement of corporate bonds through the following methods:
First, direct offering to investors. This is a method where the issuing organization sells bonds directly without intermediaries. The issuing organization will carry out the procedures for the offering themselves, such as preparing documents, registering the offering, distributing securities, etc. This requires the issuing organization to have a wide distribution network and good capital management methods but helps save intermediary costs and clearly understand market demands.
Second, offering through an offering agent. An offering agent is a method where an organization acts as a representative to distribute bonds for the entity needing to distribute bonds. These organizations are typically securities companies or financial intermediaries. They have market knowledge, a wide distribution network, and will receive agency fees through an agency contract with the bond issuer.
Third, offering through underwriting organizations. According to this method, the underwriting organization will commit to buy a part or all of the bonds from the issuing organization to resell or buy the remaining bonds that have not been fully distributed or distribute the maximum number of bonds needed by the issuing organization. The issuing organization can also prepare all necessary documents and procedures before the offering and proceed with the bond distribution.
Fourth, offering through auction. Offering bonds through auction is a method where intermediary organizations conduct an auction for the amount of bonds that the issuing organization wants to sell. Investors wishing to buy bonds can participate by registering in advance and attending the auction by secret ballot. The auctioneer will determine the minimum price the buyer must pay and then conduct the auction using a price priority method. Investors will aim to buy bonds at the lowest price, while the issuing organization aims to sell the bonds at the highest quantity and price.
5. Procedure for Issuing Bonds
For the issuance of non-convertible bonds, non-warrant bonds of public companies and non-public companies; issuance of convertible bonds, bonds with warrants by non-public companies (excluding bond companies, bond investment management companies), the issuance procedure is as follows:
- Step 1: The issuing organization prepares the bond issuance dossier. Depending on the type of bond being issued, the issuing organization must prepare a complete set of issuance documents in compliance with legal regulations.
- Step 2: The issuing organization discloses information before the issuance. Disclosing information about the bond issuance is essential to help state agencies and investors easily access the information. The information provided by the issuing organization generally focuses on issues related to the current business status of the enterprise, business purposes, bond term, interest rates, investors’ rights when buying bonds, etc., to help investors foresee potential risks.
- Step 3: The issuing organization conducts the bond issuance and completes the bond distribution within the prescribed time limit. After the enterprise discloses information about the issuance, it can proceed with distributing the bonds through one of the following methods: direct sale to investors, bond sale agents, bond underwriting, auction.
- Step 4: The issuing organization registers and deposits the bonds. When issuing bonds, the issuing enterprise will register and deposit the bonds with the Vietnam Securities Depository and Clearing Corporation.
For the issuance of convertible bonds, bonds with warrants by public companies; issuance of convertible bonds, bonds with warrants by securities companies, bond investment management companies, the issuance procedure is as follows:
- Step 1: The issuing organization prepares the bond issuance dossier. Due to the specific nature of convertible bonds and bonds with warrants, in addition to the basic dossier, the enterprise must provide additional documents and comply with stricter regulations.
- Step 2: The enterprise submits one set of bond issuance dossiers to the State Securities Commission. Within 10 days from the date of receiving a complete and valid dossier, the State Securities Commission will approve in writing; in case of rejection, the State Securities Commission will respond in writing and clearly state the reason.
- Step 3: The enterprise discloses information before the issuance and conducts the bond issuance. After receiving approval from the State Securities Commission, the enterprise discloses information before the issuance and conducts the bond issuance. The proceeds from the issuance must be transferred into a frozen account opened at a bank or a foreign bank branch. The opening and use of the frozen account comply with regulations on bond issuance.
- Step 4: The enterprise reports the results of the issuance accompanied by the bank’s confirmation, or the foreign bank branch where the account is opened, to the State Securities Commission. Within 10 days from the completion of the issuance, the enterprise reports the results of the issuance accompanied by the bank’s confirmation of the proceeds to the State Securities Commission. Within 3 working days from the date of receiving the complete report on the issuance results, the State Securities Commission will notify the issuing enterprise and publish the receipt of the issuance results on its website. After the State Securities Commission notifies the receipt of the issuance results, the issuing enterprise can release the proceeds from the issuance.
- Step 5: The issuing enterprise registers and deposits the bonds.
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