On April 3rd, 2022, the State Securities Commission (“SSC“) issued Decision 181/QD-UBCK canceling 09 bond offerings from July 2021 to March 2022 of Viet Star Company, Winter Palace Joint Stock Company, Soleil investment and hotel services join stock company of Tan Hoang Minh Group (“Tan Hoang Minh“) because there are actions of disclosing false information, concealing information in individual bond issuance activities. Accordingly, the cancellation of 9 bond offerings of Tan Hoang Minh shows the potential risks of corporate bonds in the current market. In order for bonds not to become bitter fruit, in this article, TNTP will show the risks when buying corporate bonds for the investors to consider and sober when investing.
Before looking at the risks of investing in corporate bonds, let’s reiterate what a corporate bond is? A corporate bond is a bond issued by enterprises, in the form of certificates or debit entry. The enterprise is obliged to pay both interest and principal to the bondholder when the maturity is due. When the investor buys a company’s bonds, the investor is their creditor.
1. Investors are at risk when bond issuers publish false information and hide information.
From the case of Tan Hoang Minh, we need to find out whether 03 companies under the Group are eligible to issue individual bonds. Pursuant to the provisions of the Law on Securities, the subjects are allowed to issue individual bonds including Public companies and securities companies; a securities investment fund management company is not a public company.
In the case of 03 companies of Tan Hoang Minh Group, according to Decision 181, SSC has said that at the time of issuing individual bonds issuance, these companies are not yet public. Thus, it can be seen that these 03 companies did not meet the conditions of the company as a public company when offering individual bonds.
However, the main reason leading to the cancellation of 09 bond issuances by 03 companies of Tan Hoang Minh Group is because these 03 companies have published false information, and concealed information in individual bond issuance activities.
2. Warning investors of risks when they do not know the information about the security assets of the bond issuer
Bonds of Soleil Company of Tan Hoang Minh Group, at the first issuance, An Binh Securities plays the role of consulting organization, registering for bond depository; SHB is a security asset management agent, an account management organization. In the next two phases, Agribank Securities is the consulting organization of documents for sale, Vietinbank West Thang Long branch is the asset management bank account security and management. It can be seen that the case of Soleil Company belongs to the case of issuing security bonds and the asset management unit is SHB and Vietinbank.
Pursuant to Clause 2, Article 17 of Decree 153/2020/ND-CP provides for domestic corporate bond offerings. Accordingly, for bonds secured by assets, when the issuing enterprise fails to pay the bond’s interest and principal debt, the security assets will be handled to fulfill the secured obligations of the bonds in accordance with regulations of the law on secured transactions.
In case, Soleil Company fails to pay the debt or bond principal to the investor, the security assets will be handled to perform their guaranteed obligations. There are two possible scenarios:
- Scenario 1, security assets are owned by Soleil Company, at that time, normally the security assets will be handled by the asset management unit to pay interest and principal to investors;
- Scenario 2, the collateral may not be owned by the Soleil Company but is mortgaged or secured by a third party or the property may be secured for a transaction other than the security for the private placement of bonds by the Soleil Company. In this case, the handling of collateral will be more difficult because then, the security asset management unit will have to consider the order of priority for payment as prescribed in the Civil Code before making payment. payment of interest and principal to investors.
3. Investors are risky when buying bonds through the invitation of service providers without carefully understanding the financial situation of the issuer
Besides the attractive interest rates, investors are often affected by the offers of service providers such as securities companies or credit institutions. Credit institutions and securities companies only provide services and receive service fees from the issuer but are not responsible for the appraisal/assessment of the issuer’s financial position and debt repayment ability. The operation, therefore, is not responsible for whether the enterprise will repay the principal and interest of the bond at maturity.
Therefore, to minimize risks, investors must carefully evaluate risks before deciding to buy bonds; should not buy bonds through invitations from service-providing organizations without carefully understanding the financial situation of the issuer and the terms and conditions of the bonds. In addition, after buying bonds, investors need to regularly update on the financial situation, debt repayment capacity of the issuing enterprise, and whether the use of capital raised from bonds is suitable for the purpose of the issuance of bonds. At the same time, investors should carefully study their rights and responsibilities in accordance with the law when participating in securities trading.
The above are legal shares of the potential risks of investing in corporate bonds. We hope this article is useful to you.
Best regard,
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TNTP & Associates International Law Firm
Lawyer: Nguyen Thanh Ha
Email: ha.nguyen@tntplaw.com
