Tightening leverage ratio from July 1: Does not hinder corporate bond issuance activities

The Law on Enterprises (amended) officially takes effect from July 1, 2025. Accordingly, the total liabilities of an issuing enterprise (including the value of bonds expected to be issued) which is a non-public company must not exceed 5 times the equity.

In a recently released report, VIS Rating analysts said that the above regulation on tightening leverage ratios helps the legal framework for non-public companies become consistent with public companies under the Securities Law 2024 without hindering corporate bond issuance activities.

“We believe that the new regulation will have a negligible impact on private bond issuance activities. Our data on all non-public companies in Vietnam in the past three years shows that only about 25% of companies have a ratio exceeding 5 times or have negative equity,” the report said.

Although tightening the leverage ratio does not have a big impact on the market, VIS Rating also believes that high leverage is not the cause of slow bond repayment and recommends that investors should not consider this the most important factor when considering bond investment.

VIS Rating data shows that the reason why 182 businesses have been slow to pay bonds recently is not due to high leverage but mainly due to weak cash flow and poor liquidity management.

Specifically, less than 1/4 of the 182 enterprises mentioned above have a leverage ratio exceeding 5 times or negative equity. The leverage ratio of the remaining 3/4 enterprises with delayed bond payments is only 2.8 times, approximately equal to the average level of other issuers that do not have delayed bond payments.

According to the company's statistics, despite moderate leverage, 90% of delinquent bond issuers do not generate enough cash flow from operations to pay periodic interest or lack the liquidity to repay the principal when due. Nearly 40% of delinquent bonds have very short maturities of 1 to 3 years, often used for long-term projects that do not generate timely cash flow. Without a stable cash flow, issuers have to rely heavily on refinancing, in other words, using new debt to pay old debt. As a result, 85% of delinquencies occur within the first three years of issuance.

In addition, about 40% of the delinquent bonds are secured by assets that are difficult to value or liquidate, such as receivables related to real estate projects, business cooperation contracts and income rights from future projects. The lack of effective debt restructuring mechanisms and limited application of legal approaches further increase the rate of delinquency.

Therefore, although leverage is considered one of the risks to take into account, VIS Rating experts recommend that investors should consider many factors - especially the ability to generate cash flow - rather than just looking at financial leverage when buying corporate bonds.

Source: https://baodautu.vn/siet-ty-le-don-bay-tu-17-khong-can-tro-hoat-dong-phat-hanh-trai-phieu-cua-doanh-nghiep-d315424.html