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.
Note:
- "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.
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