Key takeaways
Private Credit in Vietnam- opportunities and challenges.
A significant development in the Vietnam investment landscape in recent years which facilitates the deployment of capital has been the emergence of highly structured private credit transactions. We have prepared this overview of key issues for private credit in the form of a top 10 list designed to assist credit funds and similar investors at a high level in evaluating opportunities in the Vietnam market as well as structuring considerations to facilitate a smooth execution process and sidestepping pitfalls.
1. Emergence of private credit-why now?
Historically, the Vietnam lending market has been very competitive on pricing which has made private credit returns difficult to achieve, in particular as weighed against the perceived high level of risk in the market. We have entered a phase in Vietnam's development where these statements may no longer ring true.
There are a number of transactions that historically active lenders in the market (such as commercial banks and international financial institutions) may not be in a position to finance that are now emerging in Vietnam in the form of "special situations" financings. The term "special situations" extends well beyond distressed situations in real estate which is only one example. It also encompasses investment opportunities where sponsors may be willing to borrow at higher premiums to unlock even greater value. Examples may include financing a buy-out of minority shareholders at an attractive price, a strategic acquisition, or a restructuring to lower overall tax liability.
Moreover, as discussed in further detail below, the emergence of more complex structuring for Vietnam transactions and potential exits through the public offering route may enhance Vietnam country risk appetite.
2. Vietnamese corporates have more complex capital structures. As many Vietnamese corporates have now undergone multiple rounds of foreign and domestic investment, their capitalization has become more complex. Often, one of the most challenging missing pieces to complete the cap table is structurally subordinated mezzanine debt or preferred equity. This is where private credit can also fill the gap. Increased use of preference shares is one of the visible market trends in recent years. Vietnam's Enterprise law has very few provisions governing the use of preference shares which had historically limited their use. In recent years, however, investors have grown more confident in layering multiple classes of preference shares (such as redeemable preference shares that while legally "equity" may perform more like "debt"). Shedding this reluctance is in part due to some successful exits by foreign investors of their preference share investments through redemptions and sponsor buybacks.
As an investment structure, preference shares may offer benefits both to investors in terms of flexibility of the instrument as it can be tailored to match specific funding and performance needs, but also to issuers, as use of proceeds is less restrictive for equity than for debt in several key areas (such as holding company level financings or refinancings). One challenge with the use of preference shares is that as they constitute equity, they must be denominated in Vietnam Dong (VND), though there are a number of synthetic currency adjustments that have been used.
3. Capital controls drive transaction structures. An understanding of Vietnamese capital controls is critical to properly structuring a transaction in Vietnam. 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. As mentioned in paragraph 2, preference shares must be denominated in VND.
4. Vietnam does not have a clearly developed bankruptcy/insolvency regime. 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 a consensus restructuring and potential new money financing which credit funds may be in a position to provide.
5. 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.
6. Share Security Structures have become more innovative. Share security, often the backbone of structured private credit transactions, has also evolved in two key respects.
First, under prior law, listed shares subject to security could 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.
Second, there are some positive trends with respect to enforcement mechanisms over unlisted shares. Security enforcement over shares in a Vietnamese entity- in particular unlisted shares-has always been a key area of scrutiny given limited real world examples and a perception that enforcement is a bureaucratic process requiring various approvals. Vietnam also does not have the common law concept of certificated securities, but rather the shareholder registry is the primary evidence of share ownership. A number of investors have become more comfortable with share security in structures where the sponsor has migrated their investment structure offshore. In this scenario, the sponsor will own a holding company offshore in a common law jurisdiction in which enforcement is relatively straightforward such as UK offshore jurisdictions or Singapore. The lender will take security at each layer of the ownership chain from the holding company to the relevant operating entities in Vietnam with the intent to enforce offshore. The Vietnam level security primarily serves a defensive purpose and registration with the National Registration Agency of Secured Transactions (NRAST) puts third-parties on notice as to the security.
7. 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. From our experience, one of the most important factors that determines success or failure of a Vietnam investment is alignment of interests with the founder and sponsors. Even if a transaction timeline becomes longer than anticipated, if the additional time results in developing a stronger relationship with the founder, this may ultimately benefit the investor and lead to a sounder investment foundation.
8. Special Areas of Concern. 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.
9. Exits. Private equity and private credit (in particular in the context of a convertible instrument or a preference share instrument convertible to ordinary shares) will need to understand the scope of available exit options before the initial investment is closed. Three common exits are: (1) secondary sales, (2) strategic sales, and (3) capital markets/IPO exits. Historically, investors have generally exited through the first two options. Financial investors in particular have either sold their stakes onwards to other investors at a premium or formed a consortium to sell a larger stake to a strategic player in the relevant industry sector. Since private credit funds will have limited appetite for holding equity positions post-conversion, the development of Vietnam's equity capital markets has also ushered in new exit opportunities.
10. Development of Vietnam capital markets. Vietnamese equity capital markets have become more liquid which is of course very good news for exits. In December 2024, foreign investor net selling on the Ho Chi Minh Stock Exchange reached over US$3.5 billion (nearly four times the level in 2023). If Vietnam is upgraded by the FTSE from "frontier" to "emerging" market status, this will further enhance liquidity and trading volumes in the Vietnamese markets. High profile exits through onshore IPOs in Vincom Retail and Mobile World have shown that major private capital actors can exit in this manner. There is still progress to be made, in particular with respect to navigating listing requirements and disclosure. Moreover, the wave of large Vietnamese corporates successfully completing significant overseas listings on foreign bourses has not yet blossomed. When it does, this will further deleverage Vietnam country risk and expand exit options.
[View source.]
