Corporate bond, a kind of security with a term of 1 year or more issued by an enterprise, confirms the obligation to pay principal, interest as well as other obligations (if any) of the enterprise to investors who own bonds. So, what are the characteristics of corporate bonds? To have more information about bonds, follow this article of LSX Legal Firm: “Why do businesses issue bonds in Vietnam?”
Legal grounds
- Law on Securities 2019
What is a bond?
Clause 1, Article 4 of the Securities Law 2019 stipulates:
“1. “securities” include the following assets:
a) Shares, bonds, fund certificates;
b) Warrants, secured warrants, pull options, depository receipts;
c) Derivatives;
d) Other kinds of securities defined by the Government.”
Accordingly, bonds are a type of securities and are traded on the stock market.
According to Clause 3, Article 4 of the Law on Securities 2019, a bond means a type of security that confirms the owner’s legitimate rights and interests to a portion of the debt of the issuer.
Specifically, a document of debt that stipulates the obligation of the issuer (borrower) to pay the bondholder (lender) a specified amount of money.
The issuer must pay the bondholder for a specified amount (the value of the bond), for a specified time and with a specified yield.
The issuer can be a business (the bond, in this case, is called a corporate bond), or government organization such as the State Treasury (in this case called a treasury bond), the government ( in this case called public bonds or government bonds).
On the other hand, the name of bond buyers, or bondholders (individuals or businesses, or governments) may listed on the bond (in this case, a registered bond) or not (anonymous bond). The bondholder lends the loan to the issuer and they do not bear any responsibility for the results of the borrower’s use of the loan. The issuer has the responsibility to pay according to the debt commitments identified in the loan agreement.
Why do businesses issue bonds?
- Firstly, helps businesses and companies raise capital without depleting existing shareholders’ equity.
- Secondly, with bonds, businesses can often borrow at a lower interest rate than currently available in banks. By issuing bonds directly to investors, corporations can deduct costs and fewer formalities from banks. This makes the loan process more efficient and less expensive.
- Thirdly, by issuing bonds, companies can often borrow money at a fixed rate for a longer period of time than at a bank. Most banks will not give fixed-rate loans for longer than 5 years because they fear of losing money if their cost of capital rises higher than with long-term loans. Most companies want to borrow money for a long time and therefore choose to issue bonds.
- Fourthly, the bond market provides a very simple and effective way to borrow money. By issuing bonds, borrowers do not need to go through many separate negotiations and transactions to raise the capital they need.
Why do businesses prefer bonds over banks?
Simple, cost-effective process
Although many companies are legally entitled to a bank loan, the process is expensive and time-consuming. So, companies issue bonds instead of borrowing from banks because the bond issuance process takes a less rigorous and cheaper option than the conventional bank loan route. Banks set “covenants” (rules) on borrowed money that can limit a company’s flexibility in running its business. This is understandable since the bank is just trying to minimize the risk associated with the money they lend to increase their rate of return.
Free use of capital
On the other hand, when companies issue bonds instead of borrowing from banks, bondholders put no restrictions on the terms of the agreement. Companies set up rules about the value and maturity of bonds. Furthermore, the bond market tends to have less rigid than the banks. For these reasons, companies prefer to issue bonds rather than borrow from banks because they get the capital and spend freely as they desire.
Provide benefits to borrowers
When the bond issuer creates a loan agreement, it provides investors with the opportunity to participate in the loan. The company offers identical trading to all investors regardless of whether individuals interested in buying each bond or companies buying 1000 bonds. The main loan agreement between a company and investors is called a bond contract. The power of attorney contains information that you would expect in any loan agreement, such as:
- The amount the company borrows.
- The interest the company will pay.
- Loan collateral (if any).
- When the company will make its interest payments.
- Whether the company will pay off the loan, i.e. when the bond will mature.
- Whether the company and/or investors decide to choose to shorten the initial maturity of the bond.
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Related articles
- Regulations for professional investors in securities in Vietnam
- What to do when invited to play securities in Vietnam but lost everything?
- Private placement of securities in accordance with the laws of Vietnam
Related questions
Bond term: decided by the issuer for each issuance based on the enterprise’s capital demand and market conditions.
Bonds are issued in the form of certificates, book entries or electronic data;
The issuing enterprise shall decide on the specific form of bonds for each issuance in accordance with regulations in the issuing market.
1. Respect of ownership and other rights to assets in securities activities; freedom to trade, invest and provide information about securities of organizations and individuals.
2. Fairness, openness, transparency.
3. Protection of investors’ the lawful rights and interests.
4. Accept risks.
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