There has been a significant uptick in interest from private credit in Vietnam over the past several months driven both by events in Vietnam and the backdrop of the global economic context. This primer for private credit in the form of a top 10 issues list is designed to assist credit funds at a high level in evaluating opportunities in the Vietnam market.
- Historically, a crowded and competitive playing field for offshore US dollar lending.
Since Vietnam opened its doors to foreign investment in the 1990s, Vietnam has been an active market for a wide range of lenders, including commercial banks (many of which have branches or subsidiaries in Vietnam), as well as bilateral development finance lenders and multilateral financial institutions. This competitive market has resulted in downward pressure on fees and margins which - to date - has made the Vietnam market challenging for private credit funds to achieve their target returns.
- Interest rate hikes may have levelled the playing field. The series of interest rate hikes over the past several months effected by the United States Federal Reserve have resulted in a spike in US dollar base lending rates, which impact the rates that commercial banks and other more traditional lenders are able to offer Vietnamese borrowers. Since credit funds generally do not rely on the interbank market to fund their lending and investments, the rate hikes may disproportionately affect more traditional lenders and therefore reduce the spread between rates they are able to offer Vietnamese borrowers and those proposed by credit funds.
- Capital controls drive transaction structures. The understanding of Vietnamese capital controls is critical to properly structuring a transaction in Vietnam. The Vietnam Dong (VND) is not a freely convertible currency. Offshore loans made in foreign currency with a tenor of longer than 12 months must be registered with the State Bank of Vietnam (SBV). Whilst loan registration is generally a straightforward process that normally takes around 3-4 weeks, it should be factored into the deal execution timeline. Transactions that feature more complex interest rate structures (such as PIK interest and IRR top-ups with respect to convertible instruments that are ultimately not converted) may need to be discussed with the SBV, which could lengthen the registration timeline. Offshore lenders are generally not permitted to make loans denominated in VND, though offshore investors may subscribe for bonds issued in VND. It is worth noting that certain structured products which have been popular for private credit in developed markets such as collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs) are generally not available in Vietnam.
- Distressed sectors, such as real estate, present opportunities for non-traditional lenders. Over the past year, Vietnam has faced several market shocks, in particular in the capital markets and real estate sectors. Traditional lenders may not have the risk appetite for these special situations scenarios, nor for the types of bridge financings that may be appropriate in special situations, which may result in increased opportunities for private credit to enter the market at instruments offering higher yields.
- Vietnam does not have a clearly developed bankruptcy/insolvency regime. As we have reported in other publications, Vietnam does not have a well-defined bankruptcy regime nor experienced bankruptcy judges, and large-scale bankruptcies are not common. Therefore, whilst debtor rehabilitation structures may technically exist under the law, practically, Chapter 11 type restructurings and debtor-in-possession super secured financings are rare. The absence of a developed bankruptcy/restructuring regime is a two-edged sword – whilst it may increase risk for lenders in a distressed scenario, it also tilts the dynamic towards favouring the approach of a consensus restructuring and potential new money financing which credit funds may be in a position to provide.
- Offshore lenders cannot take direct security over immovable property in Vietnam. A key structural aspect of financings in Vietnam is that offshore lenders (whether banks or credit funds) cannot take direct security over immovable property in Vietnam. There are a number of hybrid structures that have been deployed on recent transactions involving a local commercial bank participating in the financing structure by extending an onshore loan or a standby letter-of-credit, thereby creating a basis to take security over underlying immovable property.
- Lenders that are not banks or other credit institutions may now register pledges over listed shares for blocking by the securities depository. Under prior law, listed shares subject to security may be registered for blocking with the Vietnam Securities Depository (VSD) only if the secured parties are offshore credit institutions. In the absence of the shares being blocked from trading, the secured party must rely exclusively on contractual commitments by the custodian to take instructions from the secured party and not to sell the pledged shares absent specific instruction, rather than having the depository legally block trading of the pledged shares. Since this change in law removes the requirement that the secured party must be a credit institution to benefit from this registration, this should improve the security position of credit funds and other offshore lenders that are not credit institutions which may make share-backed financings more attractive.
- Execution timelines in Vietnam may be longer than in other markets. Private credit funds expect to deploy funds quickly. This may be more challenging in Vietnam given the loan registration requirements as discussed in paragraph 3. In addition to the regulatory regime and SBV loan registration, many Vietnamese borrowers may not be experienced in negotiating with offshore lenders which may result in longer execution timelines.
- Latent Regulatory risk. Currently, the Vietnam market is ripe for private credit to enter the market. However, Vietnamese laws and regulations change frequently and investors need to be carefully attuned to changes that may impact their proposed transactions. For example, Vietnam had considered a circular on offshore lending that would cap margins and limit the use of proceeds. That being said, once the loan is disbursed, we would not expect new laws and regulations to affect the commercial terms of disbursed loans.
- Final takeaways for private credit with respect to offshore lending. Two particular areas of sensitivity that should be carefully examined in proposed financing structures are (1) refinancing VND denominated debt with USD debt, and (2) using offshore loan proceeds to finance residential development projects.
- "Local Bank" in this context includes wholly owned subsidiaries of foreign banks and foreign bank branches.
- "Credit Institutions" include commercial banks, consumer finance companies, finance leasing companies, and micro-credit funds.
May 252023Global Financial Markets Podcast
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