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NPL trading yet to leave its footprint on the market
06/08/2010 - 168 Lượt xem
NPLs, in other words, is bad debt. Financiers buying NPLs expect profits through turning an NPL into securities by issuing bonds on the stock market for mobilising capital. Typically real estate mortgage securities and equity mortgage securities in the case of a debt-equity swap (ie: transformation of creditor rights into equity rights in debtors’ firms). NPL trading is needed to refine the financial stagnancy of firms, particularly Vietnam’s state-owned enterprises which are in major need of financial restructuring for equitisation. After looking at China, foreign banks and finance institutions are eyeing Vietnam as a potential market for NPL trading. Unfortunately, the legal framework has not been completed yet to uphold NPL related transactions and caused certain problems for NPL traders.
In Vietnam, pursuant to Decision No. 140/1999/QD-NHNN14 of the State Bank of Vietnam dated April 19, 1999, numerous institutions may be involved in the purchase of debts from commercial banks such as credit institutions (state-owned commercial, investment, development, joint stock commercial and joint venture, policy and foreign bank branches, plus central credit funds), finance companies, finance leasing firms, companies for management of debts under commercial banks, companies for sale and purchase of debts (in fact only the Debt and Asset Trading Company, has been incorporated), and even foreign entities. It’s clear that companies for management of debts under commercial banks will manage and sell debts and assets of their affiliated banks. Vietnamese laws are, however, silent on whether they can buy and sell loans of other banks.
Laws uphold the operation of specific purpose companies, or SPCs, which together with asset management companies are typical in NPL business and convenient in fundraising through issuance of bonds. SPCs are usually paper companies to be operated just for holding equity in other firms. There are, however, still numerous questions vis-a-vis the legality and possibility of SPC establishment in Vietnam. Vietnamese law on enterprises requires a company to be established and have substance. Yet, it is unclear whether the mere holding of equity in other firms would be deemed a business function acceptable to business registrars.
Foreign entities buying NPLs in Vietnam also face hardships from legislation since laws require the sale of debts overseas to be approved by the State Bank of Vietnam. Normally the sale of debts encompasses the transfer of security interests to debt buyers. A big concern delineated by foreign banks is whether, and to what extent, they can hold the security interests in Vietnam, under the condition that Vietnamese laws do not allow the mortgage of land use rights and terrestrial assets with banks overseas. The real estate trust transactions, which are allowed in many countries, would also face legality and possibility questions.
The legal problem with debt-equity swap transactions has caused other problems. Debt buyers are wondering which way they can convert their creditor right into equity right (ie: to become a shareholder in creditor’s firm). Vietnamese laws provide for the admission of new shareholders only by means of transfer of shares with the consent of current shareholders, provided the business registrars agree on the registration application dossier. There is no enabling legal mechanism for conversion of debts into equity of a debtor’s firm in the cases that debtors do not support the whole process. The problem is that the business registrars may not have the power to enforce the mortgage transactions using shares as a security interest. Court proceedings would be helpful to enforce the conversion but it shall inherently consume time and costs of creditors. Even if the debt-equity swap transaction is able, foreign creditors shall face the ceiling limitation on foreign equity in debtor’s local firms, which is currently 30 per cent. A new cap would be proposed under the to-be-issued under the guidance of the new 2005 Law on Enterprises.
The SPC’s issuance of bonds for raising funds shall also face difficulties caused by an incomplete legal framework because the issuance of bonds to the public needs to be approved by the state securities committee. The issuance of bonds at OTC markets has to wait until recently issued Decree 52/2006/ND-CP, which requires that an SPC must have been operating for one year and made profits in the preceding year. Current regulations only regulate issuance of bonds in Vietnam and there is no legal guideline with respect to issuance of bonds in the overseas market by privately-owned enterprises or foreign-invested enterprises. There is the Government’s Decree No 23/CP dated March 22, 1995 on the issuance of international bonds, which only regulates the international bonds issued by the government, state-owned commercial banks and state-run enterprises.
Apart from the above, foreign financiers wishing to enter Vietnam’s market for NPL business have often raised queries on the type of business function when the enterprises to be incorporated involve solely NPL business. They are unsure about the possibility of the incorporation, and if it is possible, whether the form of the enterprise would be deemed a finance company. The message has been made clear that should the government wish the banking system in Vietnam to run smoothly in line with international practices, and financiers’ demand to help refine firms’ financial stagnancy, more efforts should be made to first improve the current legislation.
Source: Vietnam Investment Review
In Vietnam, pursuant to Decision No. 140/1999/QD-NHNN14 of the State Bank of Vietnam dated April 19, 1999, numerous institutions may be involved in the purchase of debts from commercial banks such as credit institutions (state-owned commercial, investment, development, joint stock commercial and joint venture, policy and foreign bank branches, plus central credit funds), finance companies, finance leasing firms, companies for management of debts under commercial banks, companies for sale and purchase of debts (in fact only the Debt and Asset Trading Company, has been incorporated), and even foreign entities. It’s clear that companies for management of debts under commercial banks will manage and sell debts and assets of their affiliated banks. Vietnamese laws are, however, silent on whether they can buy and sell loans of other banks.
Laws uphold the operation of specific purpose companies, or SPCs, which together with asset management companies are typical in NPL business and convenient in fundraising through issuance of bonds. SPCs are usually paper companies to be operated just for holding equity in other firms. There are, however, still numerous questions vis-a-vis the legality and possibility of SPC establishment in Vietnam. Vietnamese law on enterprises requires a company to be established and have substance. Yet, it is unclear whether the mere holding of equity in other firms would be deemed a business function acceptable to business registrars.
Foreign entities buying NPLs in Vietnam also face hardships from legislation since laws require the sale of debts overseas to be approved by the State Bank of Vietnam. Normally the sale of debts encompasses the transfer of security interests to debt buyers. A big concern delineated by foreign banks is whether, and to what extent, they can hold the security interests in Vietnam, under the condition that Vietnamese laws do not allow the mortgage of land use rights and terrestrial assets with banks overseas. The real estate trust transactions, which are allowed in many countries, would also face legality and possibility questions.
The legal problem with debt-equity swap transactions has caused other problems. Debt buyers are wondering which way they can convert their creditor right into equity right (ie: to become a shareholder in creditor’s firm). Vietnamese laws provide for the admission of new shareholders only by means of transfer of shares with the consent of current shareholders, provided the business registrars agree on the registration application dossier. There is no enabling legal mechanism for conversion of debts into equity of a debtor’s firm in the cases that debtors do not support the whole process. The problem is that the business registrars may not have the power to enforce the mortgage transactions using shares as a security interest. Court proceedings would be helpful to enforce the conversion but it shall inherently consume time and costs of creditors. Even if the debt-equity swap transaction is able, foreign creditors shall face the ceiling limitation on foreign equity in debtor’s local firms, which is currently 30 per cent. A new cap would be proposed under the to-be-issued under the guidance of the new 2005 Law on Enterprises.
The SPC’s issuance of bonds for raising funds shall also face difficulties caused by an incomplete legal framework because the issuance of bonds to the public needs to be approved by the state securities committee. The issuance of bonds at OTC markets has to wait until recently issued Decree 52/2006/ND-CP, which requires that an SPC must have been operating for one year and made profits in the preceding year. Current regulations only regulate issuance of bonds in Vietnam and there is no legal guideline with respect to issuance of bonds in the overseas market by privately-owned enterprises or foreign-invested enterprises. There is the Government’s Decree No 23/CP dated March 22, 1995 on the issuance of international bonds, which only regulates the international bonds issued by the government, state-owned commercial banks and state-run enterprises.
Apart from the above, foreign financiers wishing to enter Vietnam’s market for NPL business have often raised queries on the type of business function when the enterprises to be incorporated involve solely NPL business. They are unsure about the possibility of the incorporation, and if it is possible, whether the form of the enterprise would be deemed a finance company. The message has been made clear that should the government wish the banking system in Vietnam to run smoothly in line with international practices, and financiers’ demand to help refine firms’ financial stagnancy, more efforts should be made to first improve the current legislation.
Source: Vietnam Investment Review
