I’m excited. As of a couple of hours ago, Vietnam has gone over 40 hours without a new case of Covid-19. That means it took only a month for the country to effectively control a second outbreak of the virus. Here’s to hoping the trend continues. But with that in mind, there is a lot of debt floating around Vietnam. Debt from banks and other credit institutions–primarily home, car, and business loans–and from private individuals or organizations–ranging from illegal credit sharking arrangements to legitimate business investments structured as debt–plagues Vietnam.
According to the World Bank, domestic credit extended to the private sector was 138% of GDP in 2019. In China the number is approximately 52% and in Singapore its in the low 60s. Now, those numbers include all credit incurred by an organization of any kind capable of imposing a repayment obligation and ranges from individual bank loans to purchases of non-stock securities in companies to even sometimes loans to public corporations. So it’s hard to understand exactly how much debt exists, but according to Fitch Ratings, in 2018, Vietnam’s consumer debt per member of the work force, 83% of that individual’s average annual income. That’s a lot of debt.
And that was before Tet 2020, or the beginning of Covid-19’s affect on Vietnam’s economy. As of June 2020, Vietnam’s General Statistics Office estimates that over 30 million people have lost their jobs or been forced to take reduced pay or hours. That’s 30 million people who aren’t able to pay their debts. Now, the 83% number above is an average and not everyone of those workers who has been laid off because of Covid-19 owes money, but still, the number of credit agreements that are strained, about to default, or already defaulted is high.
A report by VN Express in April suggested that even by that time, banks were seeing anywhere from a 10% to 500% increase in overdue loans. Add this to Vietnam’s already shaky banking foundation and the country is in for a precarious time financially. And then there’s the report that banks are struggling to offload foreclosed properties and the banking sector is in a pinched position. All of this means that, if you have debt and are willing to pay some portion of it, you may be in a good position to negotiate a less strict repayment schedule, reduce interest owed, or some other agreement that will provide the bank with some solvency in this troubled time.
The rest of this article will examine the options for restructuring debt short of bankruptcy (next week we’ll talk about that very final option) from triggering Covid-19 relief legislation to renegotiating directly between the borrower and the lender (both credit institution and otherwise) to seeking court ordered restructuring.
COVID-19 and Debt Restructuring in Vietnam
In March, the State Bank of Vietnam (SBV) issued guidance for banks, credit institutions, and non-institutional lenders that fell under the ambit of the SBV on how to address the alarming increases in late debt payments due to the economic fallout from Covid19. Loans made by subject institutions in Vietnam may be restructured upon request of the borrower if:
- The debt arose from lending or finance leasing activities;
- The obligation to repay the principal debt and/or interest arose within the period from 23
January 2020 to the day after three months have expired from the Prime Minister’s
declaration that the Covid-19 epidemic has ended (which hasn’t happened yet); and
- The customer is incapable of making timely payment of the principal debt and/or interest
under the executed loan/financial leasing agreement because the customer’s turnover and
income is reduced as a result of Covid-19.
A Bank may make a decision to restructure the repayment term of any debt that meets these requirements upon the request of the customer and an assessment by the Bank of the customer’s ability to repay, as appropriate to the level of impact of Covid-19. However, the debt concerned must not be debt which is in breach of law and the restructuring term (in case of term extension) cannot exceed 12 months from the final date on which the customer must fully repay the total of principal and interest under the executed loan/financial leasing agreement.
Banks may exempt and reduce interest and fees in accordance with their internal rules applicable to debts arising from credit extension activities (except for purchasing and investing in corporate bonds) in cases where the obligation to repay the principal debt and/or interest is due in the period from 23 January 2020 to the day after three months from the Prime Minister’s declaration that the Covid-19 epidemic has ended; and the customer is incapable of making timely payment of the principal and/or interest under the executed agreement because the customer’s turnover and income is reduced as a result of Covid-19.
That means that, supposing you were a borrower and payment came due from the middle of January 2020 through probably at least the end of this year (depending on when the Prime Minister declares the pandemic in Vietnam over) you have the right to request your lender, if they fall under the supervision of the SBV, to restructure your loan payments by either delaying them or reducing/exempting fees and interest. This is a special dispensation offered because of the dire situation of Covid-19, but for 30 million workers, this may be the best option for restructuring debts that they incurred when the economy was growing and the near future looked bright.
How to Restructure Consumer Debt in Vietnam Normally
If your ability to repay your debt hasn’t been affected by Covid-19, or you are looking to restructure debt without calling upon the emergency powers granted by the SBV, then you can seek to negotiate with your lender who may be either a financial institution or a private individual or enterprise. There are different rules depending on the identity of your lender.
Restructuring a privately held loan in Vietnam
Starting with the non-credit institution lender, the basic relationship between the borrower and the lender is defined as contractual. The lender lends the borrower money now in return for which the borrower agrees to repay the lender and pay interest over a sustained period of time, thus creating a profit motive for both sides. The borrower receives money in the present, when he needs it, and the lender gets money in the long term as an option to grow his wealth. The problem is when the borrower’s circumstances change so drastically as to make performance difficult or impossible to conduct.
In this situation, there are certain legal criteria which must be met by the borrower in order to legally request a renegotiation of the contract and effect a restructuring of the loan. There are five criteria that must be satisfied for the change in circumstances of the borrower to be considered “basic” enough to justify renegotiation of the contract.
- The circumstances change due to objective reasons occurred after the conclusion of the contract;
- At the time of concluding the contract, the parties could not foresee a change in circumstances;
- The circumstances change such greatly that if the parties know in advance, the contract has not been concluded or are concluded, but with completely different content;
- The continuation of the contract without the change in the contract would cause serious damage to one party;
- The party having interests adversely affected has adopted all the necessary measures in its ability, in accordance with the nature of the contract, cannot prevent or minimize the extent of effect.
Remember, all five of these circumstances must be met prior to requesting renegotiation. Because the law, in general, respects contractual agreements between parties, it sets stringent bars against changing those agreements. Thus, it may be easier to renegotiate a loan agreement and restructure debt with an accredited financial institution for, even if the borrower meets these criteria, the lender may still refuse to renegotiate and the borrower’s only remaining option is to seek remedy at court. Something which the court will only grant a modified contract if court ordered cancellation will cause more harm than enforcement of a modified agreement.
Restructuring a loan held by a financial institution in Vietnam
Credit institutions in Vietnam have legislated options for restructuring loans when borrowers are unable to pay the borrowed amount according to contracted time periods or interest payment structures. It is within the bank’s discretion, however, whether to restructure a borrower’s loan in a permissible way, or to simply foreclose on the loan. As I stated above, it is in the bank’s interests to obtain as much money on a defaulted loan as possible, thus if they deem it likely they can obtain more money through a restructuring than through foreclosure, then they are more than likely to pursue the former in the borrower’s favor.
When a credit institution considers whether to restructure a loan they look at several factors. First, they look at the request of the borrower–that means the request must be initiated by the borrower–at the credit institutions ability to eat the changes to the loan contract, and the borrowers ultimate ability to repay the loan on any amended terms upon which the parties may agree. If they deem the borrower a good risk, they may adjust the periods for payment while not adjusting the term of the loan, or they may adjust the term of the loan. This is an important term because failure to restructure a loan term prior to the borrower failing to pay the debt on time shifts the loan from on-time to overdue and allows the credit institution to trigger collection procedures against the borrower. In order to avoid collection, it is important for a distressed borrower to request a restructuring of the loan prior to or no later than ten days after the expiration of the original loan term.
These are the two options presented to individual borrowers if they have borrowed from a private lender or a credit institution. The same holds true, essentially, for corporate borrowers with the exception of publicly listed enterprises.
Debt Swaps by Enterprises in Vietnam
For shareholding enterprises in Vietnam, particularly publicly traded enterprises, the option of conducting a debt/equity swap with creditors is available. A debt/equity occurs when a company owes money to a creditor and, instead of repaying that money with interest, offers property such as shares in satisfaction of that debt. For publicly listed companies in Vietnam, a debt/equity swap may occur only after certain restrictions are satisfied related to shareholder approval, proper valuation, and arms-length trading requirements between the enterprise and the creditor. Non-public shareholding enterprises in Vietnam may conduct a debt/equity swap using a private placement of shares upon similar conditions, though they may also offer shares of other enterprises owned by the indebted company or its shareholders or other publicly held shares held by the same. This is a complicated process and, depending on how many company’s shares are involved, may require the approval of several companies’ shareholders and conceivably regulatory approval if the size of the swap is large enough in a given sector. And the efficacy of any such swap is dependent on the anticipated continuation of value on the part of the indebted company. If the creditor feels that the enterprise is insufficiently capitalized, or is in danger of insolvency in the near future, it is easier to proceed with seeking a judgment of insolvency from the courts and to then simply sell off the assets of the indebted company and satisfy senior debt in that manner. (But that’s for next week’s discussion.)
Restructuring Debts through the Courts in Vietnam
While it is possible to take a contractual issue to the courts as a matter of Civil Code jurisdiction, most likely, a debt will only reach the courts in the case where someone–either the creditor, the borrower, or another stakeholder (if the borrower is an enterprise)–has filed a petition to initiate bankruptcy procedures with the court. I won’t go into all the details of the bankruptcy procedure here (as I intend to do that next week) but needless to say, after the court has accepted a petition to initiate bankruptcy procedures, the creditors of the potentially insolvent party come together for a creditor meeting.
During the creditor meeting, the creditors of the debtor–usually credit institutions, private lenders, suppliers, employees, etc.–will discuss the various aspects of the debtor’s financial status including the business status and financial position of the insolvent enterprise, the results of the inventory of assets, list of creditors, list of debtors and other necessary contents. After reviewing this material, and discussing the debtor’s options for moving into the future, the meeting of creditors can propose a couple of options. First, they can suggest that the court proceed with bankruptcy, sell off the debtor’s assets, and satisfy as many creditors as possible from the proceeds. Second, and this is why I include this here, the meeting can propose a plan for solvency.
A plan for solvency is a negotiated agreement between the meeting of creditors and the debtor during which the debtor will continue to operate for a given period of time under the observation and consultation of the court, with the intention of turning their fortunes around sufficiently to then be able to satisfy the creditors and pull out of insolvency into a profitable and debt free position. While this takes more time, usually several years, if the meeting of creditors agree, it is the best potential for them to obtain full satisfaction for their contracts with the debtor.
The most important part of this return to business activity plan is the agreed restructuring of debts with the myriad creditors. The meeting of creditors cannot simply say we will impose our accounts on the debtor with additional interest over the time it takes for him to return to solvency. Instead, they, too, have to take a haircut on their repayment options–though it usually is less of a haircut than the most senior of debt would receive in the case of a full declaration of bankruptcy. It is the last ditch effort the court allows for restructuring and salvaging the solvency of a debtor before making the final and ultimate declaration of bankruptcy.
For even after the meeting of creditors agrees to restructure the debt and the court supervises the continued activities of the debtor, if enough conditions are not met by the end of planned period for repayment, the meeting of creditors can still ask the court to declare the debtor bankrupt and sell off his assets in hopes of recouping some of their initial investments. But more on that next week.
Conclusion: Or Restructuring Debt in Vietnam Redux
There you have it. Several methods for restructuring debt in Vietnam. As I began this article examining the dire effects of Covid-19 on a country that has fared among the least scarred by the pandemic, I want to reiterate the importance of understanding how to restructure debt. As individuals, companies, and a country Vietnam has an outsized amount of debt. While there is some good that can be done through bankruptcy and foreclosure for lender’s bottom lines, the most effective way to recoup unpaid loans is through a negotiated restructuring of those loans.
Restructuring can be done for individuals and for enterprises, through contractual negotiations with private lenders or through regulated procedures through credit institutions, through debt/equity swaps for shareholding enterprises, or through more drastic bankruptcy procedures and a return to business activity supervised by the court. Regardless of how an overdue debt is restructured, the Vietnamese government has made it easier–at least for the moment–to restructure loans for those adversely affected by Covid-19.
With all of that in mind, there are a lot of legal ins and outs involved with a proper debt restructuring, especially at the enterprise level. Don’t rely on cheap “consultants” who aren’t trained in legal matters. Indochine Counsel has experienced lawyers with contacts in many of the major credit institutions in Vietnam. If you need to restructure your loan, feel free to contact your lawyer of record or come to us through our website at: www.indochinecounsel.com. We understand you are in financial straits at the moment and will work with you to find an agreeable payment scheme. With luck, and a little skill, we can make the minimal cost of hiring a lawyer to help with your restructuring pay off in savings in the long run.