Structured Covered Bonds &

The Possibility for Adoption in Viet Nam

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Tri Nguyen July 20, 2012

13.181 words (excluding footnotes) Supervisor 1: Prof. Dr. Markus Rudolf

Supervisor 2: Christian Alexander Mecklenburg-Guzman, LLM

Table&Of&Contents&!1.!Introduction!!...................................................................................................................................!1!2.!Covered!bonds:!the!Basics!!.......................................................................................................!2!3.!Statutory!Covered!Bonds!and!Structured!Covered!Bonds!!.........................................!4!! 3.1.!Statutory!covered!bonds!!...........................................................................................!4!! 3.2.!Structured!covered!bonds!!.........................................................................................!5!4.!Covered!Bonds!in!Asia!!...............................................................................................................!6!5.!Covered!Bonds,!Structured!covered!bonds!and!Viet!Nam’s!current!legal!infrastructure!!.....................................................................................................................................!7!! 5.1.!Who!can!issuer!bonds!in!Viet!Nam?!!.....................................................................!7!! 5.2.!What!are!the!conditions!for!a!bond!issuance!in!Viet!Nam?!!........................!8!! 5.3.!Secured!transactions!!................................................................................................!10!! 5.4.!Bankruptcy!procedures!!..........................................................................................!11!6.!Covered!bond!program!variations!and!the!possibility!for!their!adoption!in!Viet!Nam!!!.....................................................................................................................................................!12!! 6.1.!Cover!pool!assets!recorded!in!the!issuer’s!register!!....................................!13!! 6.2.!The!cover!pool!assets!held!by!a!bankruptcyNremote!SPV!guarantor!!..!13!! 6.3.!Pooling!model!!..............................................................................................................!18!! 6.4.!Country!specific!variations!!....................................................................................!18!7.!Market!infrastructure!!.............................................................................................................!19!! 7.1.!Cover!pool!assets!!.......................................................................................................!19!! 7.2.!Retail!housing!finance/mortgage!market!!.......................................................!20!! 7.3.!Consumer!financing!market!!..................................................................................!22!! 7.4.!Public!sector!loans!!....................................................................................................!22!! 7.5.!Viet!Nam!Bond!&!Capital!Market!infrastructure!!..........................................!23!! 7.6.!Credit!Rating!!................................................................................................................!24 7.7.!Miscellaneous!!..............................................................................................................!25!8.!Offshore!Bond!Market!N!International!Covered!Bonds!!.............................................!27!9.!Regulatory!outlook!!...................................................................................................................!28!10.!Conclusion!!.................................................................................................................................!29!!!!!!!!!!!!!!!!!!!

Abbreviations&&!IMF! ! International!Monetary!Fund!!SBV!! ! State!Bank!of!Viet!Nam!!SSC! ! State!Securities!Commission!!SPV! ! Special!Purpose!Vehicle!!UK! ! United!Kingdom!of!Great!Britain!and!Northern!Ireland!!US! ! United!States!of!America!!VDP! Verband!deutscher!Pfandbriefbanken!(Association!of!German!

Pfandbrief!Banks)!!WB! ! World!Bank!!

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Structured Covered Bonds &

The Possibility for Adoption in Viet Nam

Abstract Viet Nam has been reluctant to jump on the securitization bandwagon as its many Asian counterparts did for the last two decades, which may be a wise decision in retrospect1. In increasingly volatile world economies and the international race for sustainable capital, covered bonds--a European creation--have emerged as a heavyweight competitor and spreaded all over the world including Asia Pacific. Viet Nam cannot once again afford to lose out on this Asia’s latest phenomenon. This paper identifies and analyzes the characteristics and the development of covered bonds through out the years, their various nuances; and tries to identify a suitable model for Viet Nam. The findings of this paper suggest that outright adoption of covered bonds or its contractual variations as an asset class in Viet Nam in the present time is premature. The possibility lies more in the future than now. This not surprising given the country’s flegling economic and regulatory infrastructures, and prevailing industry practices. Even so, the paper helps identify where the country stands, what are the problems, what are the trends, and what Viet Nam can learn from the early adopters in developing and adopting its own covered bond program in the coming years. 1. Introduction There is no doubt securitization is the instrument to blame for the 2008 financial crisis, one of the most destructive global recession since the 1930s great depression in the US. The effect of a crisis in today’s world is also exacerbated through globalization and the increasing interdependence between economies and the intricacies of global finance. Securitization was however recommended by financial experts from global institutions such as the WB and the IMF as one of the solutions to modernize and liberalize the still work-in-progress financial markets of developing countries like Viet Nam. The country has thus received a lot of assistance to modernize its capital market over the years. The bond market was inevitably among the sectors that received those supports. For good or bad reasons, Viet Nam has resisted the temptation to jump on the securitization bandwagon. With the failure of the securitization model and the common belief that the fruits of common law countries may not be perfectly suitable for civil law countries like Viet Nam2, another more conservative and sustainable asset class must emerge to replace the gaps left behind by securitization.

Many have mentioned covered bonds as an alternative to securitization3. A

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 Jordan, Cally E., Prospects for Securitisation in Transition Economies. Companies & Securities Law Journal, Vol. 2 Aleknaite-Van der Molen, Lina, Why the Fruits of Capital Markets are Less Accessible in Civil Law Jurisdictions or How France and Germany Try to Benefit from Asset Securitization (2007). DePaul Business and Commerce Law Journal, Vol. 5, p. 191, 2007, p. 194.!3 Steven L. Schwarcz, Leverhulme Lecture, The Future of Securitization, 11 November 2010, Oxford University, p. 14.

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number of Asian economies have begun adopting or introducing supporting regimes or facilitating the development of the instrument in their respective jurisdictions. Contractual variations of covered bonds also emerged in jurisdictions without separate supporting legislation through contractual arrangements, existing legal framework and securitization techniques. These instruments invariably helped Asian issuers get access to cheaper finance, a more diversified investor base and the foreign currency bond market in addition to their own. Due to structural problems within its economy, finance has been and continues to be expensive for Viet Nam. This paper will explore whether covered bonds or structured covered bonds can be an alternative to securitization to help banks in Viet Nam raise cheaper finance and in turn using those funds to support growth in the economy. The paper also identifies and analyzes the characteristics and the development of covered bonds through out the years, their various nuances; and tries to identify a suitable model for Viet Nam.

Clearly there will be differences and difficulties unique to the country’s state of development and industry practice in introducing this new instrument. It will be worthwhile to try thinking of ways Viet Nam can facilitate the adoption of this instrument due to its usefulness, and identifying along the way what can be done or should not be done to make the process transition smoothly. The results discovered are not surprising given Viet Nam’s state of development. However, sometimes knowing where one stands is just as important as having a first start – which will be the subject of this paper.

The following section 2 introduces the basics of covered bonds. Sections 3 and 4 will distinguish between statutory covered bonds, contractual covered bonds; and comment on the current trend in Asia. Sections 5 and 6 discuss the current legal infrastructure in Viet Nam, covered bond variations and how they can be applied in Viet Nam based on existing framework. The various issues affecting the prevailing local fixed income industry practice, the possibilities for Vietnamese issuers to access the international fixed income market through covered bond issuance and the regulatory outlook for Viet Nam will be discussed in the last sections of the paper.

2. Covered Bonds: the Basics There is no universal definition of what are exactly covered bonds4, and the definition and precise structure of covered bonds tend to vary from jurisdiction to jurisdiction. There is no dispute that covered bonds is one of the oldest financial instruments in continental Europe. It was first introduced in Germany in 17705, quickly adopted by neighboring countries and then spreaded through out Europe. Today, covered bonds have become one of the largest asset classes in the European bond market6. The instrument was and is still considered a continental European instrument.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4 ibid., p. 16.!!5 Richard Leong, Reuters, Factbox: What is a covered bond?, 28 July 2008, (last visited on 19 July 2012), http://uk.reuters.com/article/2008/07/28/us-coveredbonds-factbox-idUKN2856335920080728. 6 Frank Packer, Ryan Stever, Christian Upper, The Covered Bond Market, BIS Quarterly Review, September 2007, p. 43.

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Nowadays, covered bonds are issued in five continents and have reached regions far beyond its European birthplace. According to auditing firm Price Waterhouse Coopers, more than half of covered bond issuance in 2012 came outside of Europe7. That is partly explained by the increasing popularity of covered bonds as a sustainable and robust funding instrument. Generally, covered bonds is an “on-balance sheet, asset backed bank funding instrument8”, secured with a designated pool of assets called “cover pool”. The assets that make up the cover pool are known to be homogeneous and of very high quality. The composition and eligibility of the cover pool assets depends on the particular structure of the bond program or the jurisdiction of the issuing bank. Unlike other types of asset-backed securities, covered bonds are dual recourse instruments where, in addition to the cover pool assets, the issuing bank is also liable to covered bond holders for repayment of the bonds. The essential features of covered bonds are best summed up by the European Covered Bonds Council9 to include: a) Dual-recourse and public supervision: although the bond issue is

secured by a cover pool assets, the issuing bank is (i) still fully liable for repayment of the bonds (ie, coupon and principal repayment), and (ii) subject to public supervision in terms of, for example, liquidity management, credit risks, and operational risks;

b) Covered bond holders are treated as secured lenders and have priority

in respect of the cover pool assets; c) The issuing bank is obliged to make sure that the cover pool assets can

fully cover claims of covered bond holders at all time; and d) The issuing bank is subject to special supervision in respect of the

covered bond obligations. The special supervision includes (i) a special cover pool monitor; (ii) periodic audit by cover pool monitors, and (iii) continuing management of the cover pool assets in the event of an insolvent issuing bank to ensure full repayment to covered bond holders.

It is because of these special protections that covered bonds are usually given AAA credit rating, and given higher ratings than the issuing bank itself. There have been very few, if any, covered bond defaults to date because of the safeguard features built right into the core of the instrument. This partly explains why the instrument has become attractive globally as a more sustainable and robust asset-backed alternative in the aftermath of the subprime mortgage crisis. Covered bonds issuance in 2011 has reached a record of $405.1 billion world wide compared to its previous peak of $361.5 in

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7!Pricewaterhouse Coopers, Uncovering Covered Bonds, June 2012, p. 3. 8 Sabine Winkler and Alexander Batchvarov, Covered Bond Primer for the Unitiated, Bank of America Merrill Lynch, 22 January 2010, p. 1. 9 ECBC Essential Features of Covered Bonds (last visited 19 July 2012), http://ecbc.hypo.org/Content/Default.asp?PageID=503.

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201010. In the first quarter of 2012 alone, a total of $153.3 billion in covered bond issuance followed that momentum. Due to a very low credit risk premium to be paid out of the bond, issuers are able to obtain cheap source of financing and in turn able to inject these cheap fundings to the economy. For issuers from a low rating country like Viet Nam, this is attractive. Viet Nam is not a country with dedicated covered bond legislation. There are however many advantages for local banks to consider offering covered bonds or gaining similar benefits through contractual covered bonds from an issuer’s point of view11 such as having access to a very reasonably priced source of financing, having continued access to the capital market despite limited or no access to the credit markets in turmoil periods, diversification of investor base, and longer term financing in greater volume as compared to traditional debt market. These advantages can be attributed to the fact that the covered bonds are considered a very safe instrument (for example, almost 90% of European covered bond issues receives triple A rating12). They normally have assigned credit rating higher than the same issuers’ senior unsecured ratings, and that in turn helps drive funding costs to be significantly lower than otherwise could have been for a senior unsecured debt financing. It should be noted that this tradition has been subject to change with increased volatility in recent years, and the fact that the instrument became increasingly less homogeneous through geographical expansion and boom in issuance volume13. Rating methodologies thus may be changed from time to time to reflect these new developments in the market.

On the other hand, covered bonds rank just below sovereign ratings14 but provide an attractive yield pick-up, and have long been considered as triple-A assets. The market for triple-A assets never shuts15, even in times of turmoil where investors continuously look for the safest assets available to preserve their capital. Triple-A instruments make up the largest fixed income investment segment with investors ranging from central banks, to financial institutions, corporate, to individual retail investors16. In the case of issuers from an emerging market similar to Viet Nam, issuing international covered bonds also means having access to offshore investor base and foreign currency funding.

3. Statutory Covered Bonds and Structured Covered Bonds 3.1. Statutory Covered Bonds Until the first UK structured bond program was introduced in 200317, almost all !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10 Laurie Carver, Dealers draw up contract for covered bond CDSs, Risk Magazine, 13 April 2012, (last visited 19 July 2012), http://www.risk.net/risk-magazine/news/2166323/dealers-draw-contract-covered-bond-cdss. 11 Golin, (n 11), p. 55. 12 Yehudah Forster, Hélène M. Heberlein, and Alla Sirotic, Covered Bonds Ratings, Chapter 7, Covered Bond Handbook, p. 03.!13 ibid. 14 ibid. 15 Golin, (n 11), 55.!16 ibid.!17 ibid, p. 12.!

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covered bonds programs were statutory covered bonds, meaning that covered bonds, its issuance and the myriad issues pertaining to the issue such as cover pool management, over-collateralization, cover pool eligibility, ring-fencing, investors protection are regulated by law specially issued to govern the covered bond industry. As a result, the credit quality, analysis and evaluation of covered bond issuances tend to rely on the quality of the rules governing covered bonds in the respective country, albeit there may be variations due to issuer specific characteristics. Statutory covered bonds can also be enhanced structurally through contractual arrangements in regard of cover pool asset quality and monitoring, and collateralization to remedy the weaknesses inherent in the laws of a jurisdiction. Contractual credit enhancement helps the issuer reduce the risks associated with the covered bond program, and thus achieve even cheaper funding than bonds without credit enhancements. Generally, dedicated legislation helped statutory covered bonds become a rather “homogenous”18 and standardized product, and overall funding costs could be reduced as a result. Statutory covered bonds has expanded across the globe from Europe to North America to Asia and the far east, and continues to gain momentum during the last decade. There were about 25 countries with specific covered bonds legislation as at the end of 201019. The number is likely to expand further, particularly in the Asia pacific region in the year of 2012 and the following years. 3.2. Structured Covered Bonds20 In contrast to statutory covered bonds, in countries where there are or were no specific legislation governing covered bonds (for example, the UK, the Netherlands, South Korea, and the US) as a distinctive asset class, covered bonds’ contractual variations have been introduced using securitization techniques and based on general laws governing asset backed securities, general commercial, corporate, contract and secured transaction laws. In 2003, the UK was the first country with a structured covered bond program. The overwhelming success of the HBOS 2003 structured covered bond issuance has paved the way for other UK issuers to establish their own program with upwards of £20 billion in issuance in just a few years later21. These structured or contractual covered bonds can achieve the distinctive features of covered bonds using the legal, economic and market infrastructure of the particular country. Investors will have dual recourse to both the issuer and the special collateral pool, which is contractually ring-fenced using SPVs rather than special legislation like statutory covered bonds22. Rating agencies normally assume the monitoring function to ensure all contractual requirements have been met by the issuer23. They are also considered as being more flexible, highly customizable and jurisdiction specific in their

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!18 Golin, (n 11), p. 14.!19 2011 ECBC European Covered Bonds Fact Book, Chapter 5, p. 451. 20 Also called contractual covered bonds. 21!Golin, (n 11), p. 197.!22 Packer, Stever, Upper, (n 6), p. 44. !23 ibid.!

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structure to meet the specific needs of the particular issuer and investors in each particular issue. Through contractual structuring, issuers from many jurisdictions without previous covered bond history/tradition are able to ultilize the instrument to cover their funding needs in a more sustainable way. However, a number of banks from jurisdictions with covered bond legislation already in place such as France and Germany also began issuing contractual covered bonds outside of their national special covered bond laws in recent years24. This gives the issuers more flexibility in structuring their covered bond programs in terms of, for example, the eligible assets that make up the cover pool25. 4. Covered Bonds in Asia Post the sub-prime crisis, there are signs that banks and investors in asia are showing interest for yet another wave of debt capital market innovations. There has been increasing interest across asia in covered bonds as a new highly-rated liquid instrument to help banks get access to US dollar or foreign currency funding in addition to their local currency deposit, as well as to help them meet more stringent capital requirement under the new Basel rules26. The majority of countries in the Asia Pacific region have been taking a “legislative light” approach to covered bond regulation27. Existing legislation involving structured finance were ultilized in support of covered bond programs. So far, Australia is the only jurisdiction in Asia today with dedicated legislation enacted to specifically regulate covered bonds issuance, albeit bearing substantial resemblance to UK rules, which came into effect on 17 October 201128. South Korea has established covered bond guidelines29 and set out plans for adoption of its own Covered Bond Act in November 201230. New Zealand31 and Singapore32 have each proposed legislation to facilitate covered bond issuance in their respective jurisdictions, although their exact schedules for final adoption of special legislation are still not finalized. In Japan, the government has yet to introduce any concrete proposal for the country’s own covered bonds legislation although stakeholders have expressed keen interest in the instrument33. Covered bonds clearly have gained momentum and garnered significant interest in the region, and more countries are expected to follow suit the the coming years. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!24 Winkler, Batchvarob, (n 8), p. 04. 25 Packer, Stever, Upper, (n 6), p. 44.!26!Rachel Armstrong and Kelvin Soh, Asian Banks Warm to Bond Market Innovation, Reuters, 5 April 2012, (last accessed on 19 July 2012), http://www.reuters.com/article/2012/04/05/us-asia-banks-idUSBRE83408620120405. 27 S&P Comments On Emerging Frameworks For Covered Bonds In Asia Pacific, April 19, 2012, p. 02.!28 ibid, p. 03.!29 Guidelines on Covered Bond Issuances, Financial Services Commission, June 29, 2011. 30 Financial Services Commission, Task Force Form to Legislate the Covered Bond Act Press Release, 21 June 2012. 31 Office of the Ministry of Finance, Proposal for Covered Bonds Registration Requirement and Insolvency Protections, 28 March 2012. 32 Monetary Authority of Singapore, Covered Bonds Issuance by Banks Incorporated in Singapore - Consultation Paper, March 2012. 33 S&P, (n 27), pp. 11.!

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5. Covered Bonds, Structured covered bonds and Viet Nam’s current legal infrastructure 5.1. Who can issue bonds in Viet Nam? For both domestic and international bonds issuance, only local entities that are in the form of limited liability companies or joint stock companies can issue bonds. The conditions, eligibility, and administrative procedures for bond issuance may vary depending on the business line of the issuer. Financial institutions (ie, insurance companies, companies in the securities industry, or credit institutions) and state-owned enterprises tend to be subject to more stringent and elaborate requirements. They may undergo approval /registration process with a number of government authorities. For example, a bank can be subject to clearance from both the SSC of the Ministry of Finance, the securities regulator, and the SBV, the banking watchdog, in addition to its own internal clearance (ie, the general shareholders’ meeting or board approval according to the charter). For bond issuance in the Viet Nam market by offshore entities, the type of offshore institutions eligible to issue securities in its market are specifically limited to include either34: (i) An international financial institution to which Viet Nam is a party/

member. This practically narrows the roster down to the likes of the IMF or the WB or the Asian Development Bank; or

(ii) An offshore issuer which:

• Has an approved investment project in Viet Nam, or a plan for raising funds and using the proceeds collected from the [bond] offering to invest in a project in Viet Nam;

• Has an undertaking to carry out an investment project in Viet Nam; • Commits to refrain from remitting the proceeds collected from the

[bond] offering out of Viet Nam as well as not withdrawing its own capital out of Viet Nam within the term of the investment project;

• Undertakes to comply fully with an issuer’s obligations under Vietnamese laws; and

• Complies with foreign exchange rules in respect of the offering. Because of these burdensome and somewhat restrictive requirements in regard of offshore issuers, the involvement of an offshore SPV may not be feasible at all from both a legal and practical standpoint. It is also very unlikely that institutions like the IMF or the WB or the Asian Development Bank would be interested in offering covered bonds in Viet Nam. Scenario (ii) left open the possibilities for, say, an offshore parent bank’s offering of bonds in Viet Nam in order to fund the establishment of its local

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!34 Article 17a and 17b of Decree 14/2007/ND-CP of the Government dated 19 January 2007 as amended by Decree 84/2010/ND-CP dated 2 August 2010.!

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subsidiary (a foreign investment project in Viet Nam tends to require establishment of a permanent establishment in the form of either a joint stock company or a limited liability company or a partnership for project execution). The parent bank can then inject the proceeds received into the newly established subsidiary to fund the latter’s acquisition of cover pool assets to back the parent bank’s obligation as bond issuer. However, this structure suffers from a number of issues. One of the issues could be the time required to obtain a bond issuance licence for the parent bank, and the establishment licence for its subsidiary in Viet Nam can independently take at least 06 months to complete. This is not to mention the fact that the rules regarding establishing a wholly foreign owned bank in Viet Nam are very stringent and complicated. The subsidiary will be treated as a full-fledged bank in Viet Nam and will be subject to stringent minimum capital requirements and all source of banking regulations applicable to a bank. The subsidiary would also be expected to operate as a bank rather than as an SPV backing for the parent bank’s bond issue. For those reasons, using an offshore entity to serve as bond issuer does not seem like a feasible option. 5.2. What are the conditions for a bond issuance in Viet Nam? In many jurisdictions, covered bonds can be issued using asset-backed securities techniques and general contract laws, among other things, and where issuance was not prohibited albeit lack of specific governing law (eg, UK or New Zealand). In other jurisdictions (eg, Australia), covered bonds were issued only where regulatory prohibitions were removed and supporting legislation adopted35. Luckily, Viet Nam seems to fall into the first category where the instrument as bonds backed by an asset pool can be issued without specific approval from the Government as a matter of principle. That is, the bonds will be treated as ordinary bonds backed by collateral being mortgages or claims against third parties. This is legally permitted (see below). As such, the local rules on bond issuance would apply in the first place. There are no general rules governing bond issuance in Viet Nam. Each type of issue (eg, private placement, public offering, issuance by State-owned entities) is specifically regulated, and is subject to separate procedures. A private placement is an issuance to less than 100 investors, excluding professional investors (ie, credit institutions, and companies in the insurance or securities industries), and not offered through the internet or public media. A private placement is not regulated as an exempted scheme36. Specifically, a domestic private placement of non-convertible secured bonds of an issuer being a non-state-owned bank must satisfy the following conditions37 (state-owned banks are subject to a different approval and eligibility regime): • The issuer has been in operation for at least one year; • The issuer has been profitable for the year preceding the bond issuing

year as shown in its audited financial statements;

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!35 S&P, (n 27), p. 02. 36 Asian Development Bank, Asean+3 Bond Market Guide, Volume 1, Part 1, ASEAN Bond Markets Initiative, ASEAN+3 Bond Market Forum, February 2012, pp. 18. !37 Article 13 of Decree 90/2011/ND-CP dated 14 October 2011.!

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• The issuer meets capital adequacy ratios and other applicable requirements regarding prudential operations; and

• The issuer has its issuing plan approved by the relevant corporate body. Even with specific legislation in place, there has been no issuance of secured bonds to date either domestically or internationally38. Most if not all corporate bonds issuance in Viet Nam to date have been on an unsecured basis as a matter of practice. It would be interesting to see how the first secured bond issuance is carried out in the future. A bond issue can be secured by the assets of the issuing entity or a third party. Where the repayment obligations of the bonds are secured by guaranty, only a financial institution or a credit institution licensed to provide payment guaranty services in Viet Nam can issue the guaranty. This practically precludes the use of an SPV, either onshore or offshore, as guarantor for the bond issue common in structured covered bond programs in many other jurisdictions. Domestic bonds can be issued in Vietnam dong, the local currency, while international bonds can be denominated in any freely convertible currencies. However, the repayment currency of the bond issuance must be the same as the currency in denomination. Conditions for a public secured bond offering39 a. The issuer must have its paid-up charter capital at the time of

registration for public offering of at least VND10 billion in book value; b. the issuer must be profitable in the year preceding the year it registers

for the bond offering, it must have no accumulated losses up to the year of registration for offering or overdue debts of over 1 year.

c. the issuer must have a plan for offering and use and repayment of capital received from the offering approved by the Board of Management, Board of Members, or the enterprise’s owner.

d. the issuer must commit to fulfill obligations of the issuer towards investors, meet conditions for issuance and payment, and ensure investors’ legitimate rights and interests, and other conditions.

e. the issuer has payment guaranty commitment together with evidence of the financial capability of the guarantor, or have sufficient assets to cover the payment obligations of the bonds as evaluated by an authorized valuer. The assets used as security for the bond issue must be at least equal in value to the total value of the bonds registered for sale to the publicm, and registered with the relevant authority to ensure the bondholder’s priority.

f. the issuer must appoint a bond holder representative to monitor the its compliance with the commitments under the public offer. The bond holder representative must be a member of the Vietnam Securities

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!38 Article 2.3 of Decree 90/2011/ND-CP of the Government dated 14 October 2011. 39 Article 12.2 of the Law on Securities 70/2006/QH11 dated 29 June 2006 as amended by Law 62/2010/QH12 dated 24 November 2010; and Article 5.2 of Decree 14/2007/ND-CP of the Government dated 19 January 2007 as amended by Decree 84/2010/ND-CP dated 2 August 2010.

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Depository, except those who are: (i) the issuer’s guarantor for the bond offering, (ii), the issuer’s substantial shareholder, (iii) the entity to which the issuer is a substantial shareholder, (iv) the entity which have the same substantial shareholder with the issuer, (v) the entity which manager is also a managor of the issuer, or (vi) an entity which is controlled by the same controlling company as the issuer.

The legal requirements for international bond issuance are more stringent and time consuming. Specifically, among other things, the issuer must40: • have been in operation for at least three consecutive year; • be profitable in the three years preceding the year of bond issuance as

evidenced in its audited financial statements; • be in compliance with any applicable prudential rules including but not

limited to those involving capital adequacy; • have its bond issuance certified by the SBV that the issue value lies

within the country’s total annual commercial debt quota. In a separate process41, the bond issuance must also be certified by the SBV as a commercial foreign loan;

• Have credit ratings comparable to common international bond issue standard. State-owned companies / banks are require to obtain credit rating at least equal to Vietnam’s sovereign credit ratings (the government of Viet Nam received a sovereign rating of BB- on 6th June 2012 by Standard & Poor’s);

• Have its bond issuance plan approved by the General Meeting of Shareholders or the Board (for joint stock companies), or the Members’ Council/Company President (for limited liability companies), as required under the company charter. State-owned banks/ companies are subject to a different, more elaborate and complicated process; and

• have completed the issuing documentation required under Vietnamese law and in the market / jurisdiction where the bonds will be issued.

The issuing bank is required to notify the Ministry of Finance in writing prior to the bond issuance. The bank must also report to the Ministry of Finance and its relevant corporate body, and the SBV (for international issues), of the result of its bond issue. 5.3. Secured transactions There are no specific rules governing pooling receivables as security for a bond/ debt obligation. However, using the right to claim or debt repayment (with or without collateral) as security to secure an obligation is recognized42. There is no restriction in using multiple claims to secure an obligation. This does not require consent of the borrower43. However, prior notice to the debtor is required. Except where specifically required by law, registration of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!40 Article 23 of Decree 90/2011/ND-CP dated 14 October 2011. 41 ibid, Article 26.!42 Article 322 of the Civil Code No. 33/2005/QH11 dated 14 June 2005. 43 Article 22.1 of Decree 163/2006/ND-CP dated 29 December 2006, as amended by Decree 11/2012/ND-CP dated 22 February 2012.

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secured interest is not a requirement for the secured interest to become effective44. However, registration ensures that the obligee (ie, the bond holders) have first priority in respect of the assets in the cover pool. Registration of the secured interest, or change to a secured interest registration, could be done within 03 business days from submission of a complete application45. The bond holders will have direct right to claim for repayment in regard of the assets in the cover pool46. There is no need to re-execute the original mortgage contract upon transfer of receivables. However, where the mortgaged assets were registered to ensure priority in the mortgage assets towards third parties, registration of a change of the mortgagee must be carried out at the relevant secured interest registration authority47. Finally, issuing asset-backed guarantees is also recognized under Vietnamese law48. Registration of the assets backing the guaranty is generally not required, except for certain assets specifically required by law, but is recommended to ensure priority towards third parties. 5.4. Bankruptcy procedures There is no special legislation regulating segration of assets upon a bond issuer’s default as typical in covered bond enabled jurisdictions. In the worst case scenario where the issuing bank has to file for bankruptcy, the competent court will immediately innitiate liquidation procedures under bankruptcy legislation to liquidate the bank’s assets49. The cover pool assets, which still remain on the balance sheet of the issuer, will become immediately due and payable upon the issuer’s bankruptcy. The bond holder as secured creditors will have priority in respect of the cover pool assets as well as the right to pursue the issuing bank’s other assets together with other senior unsecured creditors. As the cover pool assets do not survive the insolvency of the issuing bank, covered bond holders face substantial prepayment risks due to the lack of cover pool shifting mechanism and separation of the cover pool as available in, for example, § 30 of the German Pfandbrief Act. It would take a long time, however, to have a bank in Viet Nam file for bankruptcy. Vietnamese law requires a credit institution to notify the SBV immediately when it is at risk of dafault on payment of due obligations. A credit institution will be put under special supervision by the SBV in several specific instances such as if a likely default on due payment obligations or failure to maintain minimum capital adequacy ratio. From special supervision by the SBV to filing for bankruptcy and then liquidation of assets is a tightly controlled process. A special supervisory committee will be established by the SBV to restructure the business, monitor the operation and organzation of the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!44 Article 323 of the Civil Code No. 33/2005/QH11 dated 14 June 2005. 45 Article 18.1 of Decree 83/2010/ND-CP dated 23 July 2010.!46 Article 66 of Decree 163/2006/ND-CP dated 29 December 2006, as amended by Decree 11/2012/ND-CP dated 22 February 2012.!47 ibid, Article 22.5.!48 ibid, Article 44. 49 Article 155 of the Law on Credit Institutions 47/2010/QH12 dated 16 June 2010.!

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credit institution, and making suggestions to the SBV for crisis resolution. Based on the suggestions of the special supervisory committee, the SBV will decide on whether to extend a special, “super senior” loan to the credit insitution; or arrange for a forced acquisition, merger or take-over of the credit institution; or allow the credit institution to file for bankruptcy. As a matter of practice, however, bankruptcy of a credit institution in Viet Nam has been very rare. There have been no banks officially entered into bankruptcy procedures and liquidated in Viet Nam to date. The SBV also showed reluctance in letting local banks go bankrupt, even amidst the very hash economic conditions in the year of 2010 and 201150. One of the bank resolution strategy recently used was for the SBV to arrange for a merger between several troubled banks deemed too weak to survive on their own into a newly formed lender with some percentage of State-ownership51. On 1st March 2012, the SBV approved the Scheme for Restructuring the System of Credit Institutions in the Period of 2011–2015 to develop a modern, safe, sound, and efficient operation of the financial sector in line with international banking standards and practices. This plan was considered a “very ambitous52” strategy to deal with the country’s ailing banking sector. However, the eventual success of the plan will largely depend on how it will be executed in the coming years, which remains to be seen. On another note, Viet Nam’s World Bank insolvency ranking53 for the year of 2012 is 142, fell 12 ranks as compared to it 2011 ranking; with average time for insolvency procedures of 5 years as compared to the Asia Pacific average of 2.9 years; bankruptcy costs an average of 15% of the value of the estate as compared to East Asia & Pacific average of 23%; and a recovery rate of 16.5 cents on the dollar as compared to the Asia Pacific average of 29.5 cents on the dollar. Although bankruptcy of the issuing bank has been very rare in the long history of covered bonds, the strength of bankruptcy procedures and investor protection in the issuing jurisdiction surely provides comfort to investors in purchasing the instrument. Viet Nam is somewhat a mixed bag in general efficiency of bankruptcy legislation. But the lack of dedicated rules for segregation of the mortgaged assets from the originator’s insolvency and covered bond shifting mechanism, as well as the absence of rules supporting the use of bankruptcy remote SPVs (see Section 6.2) makes covered bonds or similar instruments lose their attractiveness in investors’ eyes, at least for the time being, despite Viet Nam’s low bank insolvency record. 6. Covered bond program variations and possibility for their adoption in Viet Nam The specific structure of covered bond programs tends to vary from

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!50 World Bank East Asia and Pacific Economic Update 2011, Vol. 2., p. 82. 51 Vu Trong Khanh, Viet Nam Approves Merger of 3 Commercial Banks, The Wall Street Journal, 6th December 2011, (last accessed 19 July 2012), http://online.wsj.com/article/SB10001424052970204903804577081353778553644.html. 52 IMF Country Report No.12/165 (Viet Nam), July 2012, p.13.!53 World Bank Doing Business 2012 data for Viet Nam.

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jurisdiction to jurisdiction. Nonetheless, most covered bond issuances fall into the following four variations: 6.1. Cover pool assets recorded in the issuer’s register54 This is the simplest form of a covered bond program where the isuer retains both legal and economic titles to the cover pool. The assets in the cover pool are recorded in a register, and segregated from the issuer’s other obligations (ie, the cover pool assets are protected from claims by ordinary creditors of the issuing bank55). Covered bonds do not accelerate upon insolvency of the issuing bank, and depending on the country, the cover pool continues to be managed by the cover pool administrator through out and/or post the issuing bank’s bankruptcy procedures (as in the case of Germany under the Pfandbriefe Act56). Covered bond holders will have priority over the cover pool assets to satisfy their claim and have the right to participate in the issuing bank’s other assets in case the assets in the cover pool are not sufficient to satisfy their claims. This structure tends to be prevalent in countries with specific and dedicated covered bond legislation such as Germany, France, Denmark, Austria, Turkey. What Viet Nam lacks in this structure is provisions for the cover pool assets’ survival indedepent of initiation of the insolvency proceedings of the issuing bank. That is, the traditional cover pool assets as secured interests of the bond holders must be segregated from the issuing bank’s other assets under the rules on secured transactions or special covered bonds legislation. Without that special protection, the covered bonds will be accelerated and the issuing bank’s assets will be liquidated upon opening of bankruptcy procedures in accordance with bankruptcy law and the Law on Credit Institutions. Although bankruptcy and liquidation of a local bank has been very rare in Viet Nam, the lack of dedicated legislation poses prepayment risks to the covered bond holders. What Viet Nam lacks in this case is special legislation-enabled cover pool administrator and true bankruptcy segregation of the cover pool assets. There doesn’t seem to be a feasible way around this issue pending Viet Nam’s enaction of special laws on covered bonds. Surely the country can learn from jurisdictions with long eatablished covered bond legislation such as Germany, Denmark or France. But that study normally requires a great amount of preparation time and enormous political willingness. Luckily the government has recently shown its willingness to facilitate the adoption of this type of instrument in the country over the course of this decade (see Section 9). 6.2. The cover pool assets held by a bankruptcy-remote SPV guarantor57 The loan originator, typically a bank, issues covered bonds as its own direct and unconditional obligations, and onlends the funds raised through the bond issue to an independent SPV by way of a deferred payment loan mirroring the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!54 Winkler, Batchvarov, (n 8), p. 08. 55 Golin, (n 11), p. 33.!56 Otmar Stöcker, 2010 Amendment of the Pfandbriefe Act, the Pfandbriefe 2010/2011, Association of German Pfandbrief Bank p. 22. 57 Structured Covered Bonds, Malaysia Rating Corporation Berhad, July 2010, p. 02.

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debt profile of the structured covered bonds. This SPV will then use the loan proceeds to acquire the cover pool assets from the originator on a true sale basis (true sale of the receivables permits bankruptcy segratation from the originator, and are easier to appraise their market value or for credit rating purposes58), and guarantees the issuer’s repayment obligation of the covered bonds backed by the cover pool assets. The covered bond holders will have first recourse on the SPV guarantor’s assets, and the right to participate in the issuing bank’s assets as unsecured senior creditor. The issuing bank or an independent servicer can provide cash management and compliance monitor services for the covered bond program. This structure is commonly used in the United Kingdom, Canada, Netherlands and Italy59. A variation of this model can be a scenario where an SPV (SPV 1), wholly owned by the originating bank, issues covered bonds as its direct and unconditional obligations. Funds raised through the covered bond issuance will then be onlent to another independent SPV (SPV 2) by way of a deferred payment loan mirroring the debt profile of the structured covered bonds. SPV2 will use the deferred payment loan proceeds to purchase the cover pool assets from the originating bank. The originating bank assigns the deferred payments to SPV 1 for repayment of the covered bonds obligations. SPV 2 will guarantee the repayment obligations of the covered bonds using the cover pool assets it acquires. The remaining steps are similar to the abovementioned structure. The structure of these contractual covered bond programs invariably borrows structured finance techniques involving securitization to achieve the desired results. However, in using securitization techniques, which is a product originated from common law, and applying them into civil law countries like Viet Nam, a number of issues would be relevant and should be addressed from a regulatory standpoint such as60 the ability to create a bankruptcy remote entity to receive transfer of the receivables, simplicity in transferring the receivables, transfer of the underlying collateral together with transfer of receivables, and notification obligations required for transfer of receivables does not cause unnecessary burden for the transaction. Post-insolvency treatment (ie, bankruptcy remoteness v.s. bankruptcy segregation) in regard of covered bond holders plays a major role in the success of a covered bond program. Bankruptcy remoteness is a securitization technique where the SPV is legally independent from the nominal parent or affiliated company and survives the insolvency of the latter. Bankruptcy segregation means the cover pool assets are separated from the issuing bank’s other assets and are not subject to the bank’s other creditors’ in bankruptcy procedures.

Bankruptcy remoteness is probably more relevant in the case of structured covered bonds where the cover pool assets are held by an independent SPV. And the insolvency of the parent institution will not necessarily trigger the

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!58 Molen, Lina, (n 2), p. 197. 59 Winkler, Batchvarov, (n 8), p. 09.!60 Molen, Lina, (n 2), p. 200.!

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accelleration of the obligations underlying the covered bond program. It is important that they willl not become immediately due and payable, and continue to pay interest and principal on a timely basis. However, given the fact that default has been very rare in the long history of covered bonds and for as long as the issuer continues to meet its obligations towards shareholders, covered bond holders have less reasons to worry about the overall performance of the cover pool assets61.

As is typical for jurisdictions without legislation-enabled securitization techniques, transfer of receivables requires notification in advance to the debtor in order for the transfer to take legal effect. This makes sense in helping the debtor know to whom s/he owes the money. This is however too cumbersome in securitization involving a mass transfer of receivables, normally thousands of them, to make up the usually large pool of receivables. Applying normal notification obligation under general secured transactions laws would make the whole process becoming inefficient and expensive62. Many structured covered bond programs borrow securitization techniques in respect of creating an SPV to either hold the cover pool or serve as bond issuing conduit for the parent bank. An SPV may take the form of either a trust, a limited liablity company, a corporation, or a special legislation enabled entity such as FASITs, RICs, and REITs63. In regard of securitisation and structured covered bond program borrowing securitisation techniques, SPVs are perhaps most commonly structured to take the form of a trust which is “a fiduciary relationship with respect to property, arising as a result of a manifestation of an intention to create that relationship and subjecting the person who holds title to the property [the trustee] to duties with it for the benefit of [third party beneficiaries]64”. Traditional SPV trust structures take the form of purpose trusts (ie, trusts set up to achieve limited predetermined purposes) or charitable trusts which have beneficiaries being charities, which then have transformed into commercial trusts65 being “economic deals where resort to the trust form serves a distinct commercial advantage66”. An SPV in traditional trust structure seems to be preferred by academics due to the fact that they are ineligible to be debtors under bankruptcy laws67.

Generally, the SPV tends to take the form of a tax-neutral entity which have characteristics along the following lines68: • thin capitalization; • no independent management or employees; • own administrative functions performed by a trustee who follows pre-

specified rules with regard to receipt and distribution of cash;

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!61 Forster, Heberlein, Sirotic, (n 12), p. 03. 62 Molen, Lina, (n 2), p. 198.!63 Gorton, Gary B. and Souleles, Nicholas S., Special Purpose Vehicles and Securitization (September 1, 2005), FRB Philadelphia Working Paper No. 05-21, p. 01. 64 ibid, p. 08. 65 ibid, p. 08.!66 Schwarcz, Steven L., Commercial Trusts as Business Organizations: Unraveling the Mystery. Duke Law School, Public Law Research Paper No. 32, p. 05. 67 Molen, Lina, (n 2), p. 198.!68 Gorton, Souleles, (n 63), p. 02.

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• limited scope of decision-making within the SPV; • its assets are serviced via a servicing arrangement; and • they are structured so that practically they cannot become bankrupt. Finding a SPV structure that is both tax-neutral and accounting neutral from a profit and loss and balance sheet point of view69 could be a very challenging task. This is not easy given Viet Nam’s infant infrastructure for structured finance involving SPVs. There are also complications involving transfering receivables to an offshore entity under Vietnamese law (see section 7.1 below). Similar to the case of Germany and many civil law countries in Europe in structured finance involving securitization70, Viet Nam is a civil law country and the concept of a trust (which is a common law concept) does not exist in its laws. Arrangers of securitization in Germany had to choose between using structures provided in German laws current at the time or using trusts established under foreign common law jurisdictions. Viet Nam can benefit a lot form Germany’s past experience especially in constructing securitization transactions. One of the methods employed in the 1990s was to use foreign subsidiaries/branches of German companies as holders of designated receivables, and thereafter conducting asset securitzation as a domestic transaction within that same foreign jurisdiction (the UK in that instant case) through those foreign subsidiaries/branches71. It is obvious that using the trust structure established in a foreign common law country would be quicker and arguably more efficient than changing local corporate laws. Using the analogy, one might think of transfering receivables to the foreign subsidiary or branch of the same Vietnamese bank in the country with coved bond enabled legislation or securitization/trust enabled legislation for further structuring to achieve the desired covered bond structure. This tactic has its own limitations. One of them is the lack of foreign subsidiaries or branches of local banks due to restrictive legislation. Vietinbank, one of the largest bank in Vietnam, is among the very few Vietnamese banks with subsidiary in a foreign country todate. On 12 April 2012, the bank received official approval from the SBV to estabish a wholly-owned subsidiary bank, Vietinbank (Europe) Ltd., in Frankfurt Germany with charter capital of $25 million72. Other banks are expected to follow suit in the coming years. However, the legal regulations dealing with offshore subsidiaries or branches of local banks are not complete. One problem would be that local laws would not treat the offshore subsidiary as a bank licenced in Viet Nam for obvious reasons. These subsidiaries therefore would not be eligible to receive transfer of collateral involving real estate assets (see section 7.1 below), which makes up a substantial portion of the mortgage assets in Viet Nam. With a foreign operating licence, they will also be treated as foreign lenders in receiving receivables from the parent bank in Viet Nam and will be subject to foreign loan registration with the SBV. Although the extent an overseas subsidiary’s

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!69 Golin, (n 11), p. 195. 70 Timothy C. Leixner, Securitization of Financial Assets (2007), p. 07. 71 Molen, Lina, (n 2), p. 209.!72 http://investor.vietinbank.vn/News/2012/4/10/67109.aspx

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involvement in the Viet Nam market depends on the initial approval from the State Bank of Vietnam and the laws of the country where it is established, it is unlikely that the subsidiary will be permitted to hold assets transferred to it from the parent bank or any of the Vietnamese banks except the assets that make up its charter capital. This is because it is generally understood that the overseas subsidiaries/ branches of local banks are established to gain access to a new customer base and new currency base to help the parent diversify from the domestic market. Their eligibility to receive collateral from borrowers in Viet Nam is therefore questionable pending specific legislation to be enacted in the future. The only alternative left would be for an overseas branch of a bank in Viet Nam to act as the SPV in issuing the covered bonds back into Viet Nam or internationally, or holding the cover pool assets and guaranteeing the parent bank’s covered bond issuance. This would be governed by both Vietnamese law and the laws of the jurisdiction where the branch is established. Even so, a branch is considered to be a depedent part of the parent bank in Viet Nam and at the same time is an entity licenced and established in a foreign jurisdiction. They tend to be well capitalized as a banking entity, which fails the first SPV characteristic test, and is expected to operate as bank, which fails other remainning SPV characteristic tests. To make matters worse, there is no rule at the moment in Viet Nam regarding to which extent the operation of the overseas branch can involve Viet Nam parties. As a matter of practice, it is unlikely that the SBV will approve for the parent bank to establish a branch in a foreign country just for the latter to serve as a conduit for the parent bank’s business dealings in Viet Nam. The actual approval of this type from the SBV is normally not publicly available. Choosing the private liability company form as the independent SPV like the use of the German Gmbh in German banks’ experimentation with securitization73 may not be practical from the standpoint of Vietnamese law. This is because managers’ obligation to file for bankruptcy when the company is considered insolvent is required by law and cannot be opted out74. Under the Law on Enterprises--which governs the establishment, operation, organization, and restructuring of companies in Viet Nam--a limited liability company does not necessarily have to have charter capital, except in industries where a specific minimum capital is required75. However, a limited liability company established merely for the purpose of issuing bonds or providing guarantees is not the business line a normal limited liability company is licenced to operate. Issuing bonds under Vietnamese law is a capital raising activity to support a company’s main business lines76, not as the main operating purposes. Besides from that, only credit institutions can provide guarantes as a main business77.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!73 Molen, Lina, (n 2), pp. 209 - 212.!74 Article 15 of the Bankruptcy Law 21/2004/QH11 dated 15 June 2006. 75 Article 18.4 of the Law on Enterprises 60/2005/QH11 dated 19 November 2005. 76 Article 12.2 of the Law on Securities 70/2006/QH11 dated 29 June 2006 as amended by Law 62/2010/QH12 dated 24!November 2010; and Article 5.2 of Decree 14/2007/ND-CP of the Government dated 19 January 2007 as amended by Decree 84/2010/ND-CP dated 2 August 2010. 77 Article 4.18 of the Law on Credit Institutions 47/2010/QH12 dated 16 June 2010.

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It is equally important for the collateral to be transferred to the SPV simultaneously with the transfer of receivables78. This is possible under Vietnamese law, but does not take place automatically for a change that requires registration with the relevant registration authority. There are no procedures for efficient mass registration under Vietnamese law at the moment, which adds to the costs of the transaction and reduces the efficiency to a large extent. Registration of secured interests has become increasingly efficient from a legal standpoint with the ability to register secured interests through an online registration system79. However, this registration system is still rather new and may take years to fully develop. 6.3. Pooling model80 The covered bonds are issued by a specialized SPV issuer and represents senior secured obligations of the issuer towards the bond holders. The issuer then lends the raised proceeds to partner banks through purchasing their promissory notes. The notes are secured by mortgages of the originators but remains on the balance sheet of the partner banks. Upon insolvency of the partner banks, the pledged mortgage loans will be automatically transferred to the issuer. The pooling model exists through specific legislation or as a matter of practice and are seen in a number of European countries such as France, Denmark, Austria, Germany, etc81. This model suffers from the same problem mentioned above involves finding the ideal SPV structure for the issue, and a lack of specific legislation providing a clear mechanism to transfer the mortgage loans to the SPV issuer. This structure is still years ahead of the current state of development of Viet Nam. 6.4. Country specific variations Indeed there are many variations and how dual recourse is achieved for covered bond holders usually seems to make the difference in the structure of each varition82. Besides the generic structures listed above, there are also jurisdiction-specific variations of covered bond program such as83 the US two-tiered, repackaging of colaterallized bonds approach, or South Korea covered bond programs borrowing complicated securitization techniques with the involvement of both onshore and offshore SPVs and trust structures. Most jurisdiction-specific structured covered bond programs are complex and unique to tailor to the specific regulatory framework and industry practice of a particular jurisdiction. They are not only too complex but also not compatible with Viet Nam’s own regulatory, economic, industry and tax infrastructure. No doubt the banking community will find a way to structure their own structured covered bond mechanism for Viet Nam should there be enough demand and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!78 Molen, Lina, (n 2), p. 197.!79 Section 6 of Decree 83/2010/ND-CP dated 23 July 2010.!80 Otmar Stöcker, Pooling models in Europe, ECBC European Covered Bond Fact Book 2008, p. 40. 81 Otmar Stöcker, Covered bond models in Europe: fundamentals on legal structures, Housing Finance International Winter 2011, p. 36. 82 Winkler, Batchvarov, (n 8), p. 08. 83 ibid, p. 10.!

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the readiness of infrastructure and government support. 7. Market infrastructure From the discussions in the previous sections, we can see that the legal infrastructure of Vietnam does not yet provide full and adequate support for either statutory or structured covered bonds. It would however be interesting to see where the market stands in providing support to the instrument as a peculiar asset class. 7.1. Cover pool assets Unlike the static nature of a securitized asset pool, the covered bond asset pool tend to be “dynamic” and “heterogeneous” and the issuer or the originator’s credit approval process is of “critical importance”84. There are many types of assets that can make up the cover pool assets such as mortgages, claims against public sector entities or credit institutions, ship mortgages and aircraft mortgages. The asset types making up the cover pool assets and their required eligibility may vary from jurisdiction to jurisdiction due to differences in regulatory environment, market/ industry practice and national economic infrastructures85. In an established jurisdiction like, for example, Germany, there are specific covered bond legislation and specific rules governing which type of assets eligible to be included in the cover pool assets and the quality of each type of those assets (eg, § 20 of the Pfandbriefe Act deals with claims against public sector entities as covered assets, § 21 of the Pfandbriefe Act regulates ship mortgages as cover assets). In South Korea, for example, Kookmin Bank’s structured covered bonds 2009 issue were backed by a mix of credit card receivables and mortgages, a deviation from the traditional cover pool asset types86. It thus is hard to generalize about the standard quality of the each type of cover pool assets. One thing that is common across jurisdictions is the fact that the assets that make up the cover pool tend to be of high quality. The quality of the cover pool in turn influences the credit rating of the issuance itself. One of the reasons for success of structured covered bond programs in South Korea was the country’s “sound economic fundamentals” and a “relatively secure mortgage market”87.

In an emerging economy like Viet Nam where there is a lack of classification of loan quality standards, it would be best for the banking community to come up with a standard by themselves. However, one thing that one can be certain is the fact that bad debts have been lingering over the Viet Nam’s loan market for some time now. Bad debts already crippled some of the local commercial banks leading to forced merger between those affected at that time earlier this year88. The unofficial non-performing loans are believed to be at least three !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!84 Golin, (n 11), p. 197.!85 European Central Bank, Covered bonds in the EU financial system, December 2008, p. 15. 86 Asian Issuance Prospects Still Slim, the Cover, 16 January 2012, (last accessed 19 July 2012), http://www.coveredbondnews.com/Article/2962033/Asian-issuance-prospects-still-slim.html 87 South Korean covered bonds: A perfect tool to diversify investment and funding sources, Bank of New York Mellon, (last accessed 19 July 2012), http://www.bnymellon.com/foresight/pdf/southkoreanbonds-1011.pdf 88 In Viet Nam, A Shipping Line Raises Alarm Over Debt, Ngo Thi Ngoc Chau, Reuters, 26 June 2012, (last accessed 19 July 2012), http://in.reuters.com/article/2012/06/27/vietnam-vinalines-idINL3E8HJ27820120627.

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times the country’s official bad debts ratio of 4.14% of the total debts (or approximately $5.2 billion)89. On the other hand, business loans are always secured in Viet Nam, regardless of how good other criteria (eg, financial and operational assessment, and sound credit history) of the borrowers are90. The most common type of security granted in Viet Nam is security over immovable property/real estate (ie, mortgages over land use rights, residential mortgages, commercial real estate mortgages), followed by security over industrial equipments, vehicles91, and inventory92. A key restriction is that offshore entities/individuals are not permitted to hold security over real estate (land use rights, building, apartment, etc.) in Viet Nam93, which limits foreign lenders’ participation in the local debt market to a large extent. A certain degree of circumvention from these retrictions has been attempted in practice, but are inherently risky and can be subject to challenge before local courts. 7.2. Retail housing finance/ mortgage market Covered bonds were originally designed to be used in specific markets and legal environments (eg, in Europe where the mortgage lending market and secured interests registration as well as supporting legislation are very standardized leading to a great deal of efficiency in their respective covered bond markets), which may not be perfectly suitable in the case of Viet Nam. It is therefore imperative to avoid the mindless adoption of the instrument without due regard to the common practice in the local market like the case of securitization in Thailand in the last decade94. Viet Nam did not rush to jump onto the securitization bandwagon, which is a good thing. This time, although a good idea to begin with, due care and thoughts should be taken with regard to whether Viet Nam is ready for covered bond as a fixed income asset class. Another question would be if the local market would be supportive of the instrument given the predorminant mortgage lending and the development of the local bond market. Ironically, with the amount of bad debts accumulated so far and recent policy developments (see section 9), securitization of subprime mortgages may be introduced in Viet Nam sooner than covered bonds in the coming years. On the other hand, one of the usual chracteristics of the local retail housing finance and mortgage market is that transactions largely takes place in an informal way and in many instances without proper registration of title. Residence purchase contracts often do not reflect the real purchase price primarily for tax reasons. Banks’ involvement as financial intermediary in the purchasing process is minimal at times. Registration of title to real estate or a change thereto is not computerized. Such registration is also a rather lengthy and involved process which can take months to complete as a matter fo !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!89 ibid. 90 Simavi, S.; Welsh, A.; Wohlers, E., World Bank, Viet Nam - Increasing Access to Credit Through Collateral (Secured Transactions) Reform, 2007, p. 14. 91 Samantha Campbell and Pham Bach Duong, Gide Loyrette Nouel A.A.R.P.I., Practical Law Company Finance Handbook 2011 Country Q&A (Viet Nam), p. 05. 92 Simavi, Welsh, Wohlers, (n 90), p. 15. 93 Article 110 and 111 of the Land Law 13/2003/QH11 dated 26 November 2003.!94 Jordan, (n 1), p. 13.!

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practice. Even a simple check of a person’s title to real property with the local land registration authorities could take several hours, and cannot be done in a systematic way and tend to require physical visits to the relevant government office. As a significant portion of an individual’s income (this is especially true for the State sector) is off the record in the form of cash, it is also very difficult for banks to verify the true income of borrowers, leading to a lending practice targeting predominantly those with high quality collateral or high come office workers in the private sector. Banks in Viet Nam also have little experience when it comes to long-term loans95. The majority of bonds in the local bond market tends to fall into the medium to short term range with the most common term being 2, 3 or 5 years96. The local culture when it comes to substantial long-tem purchases, such sa those involving residential properties, help within the family and relatives or closed friends tend to be a more preferred source of finance than bank loans. This is especially true for the young population often with insufficient cash on hands and little to give as collateral. It is also due to the fact that local bank’s lending rates tend to be very expensive (around 20% per annum), with or without security, given two digits inflation year on year. This no doubt keeps a large percentage of potential borrowers out of the mortgage lending market. Given the country’s long history of sustained yearly inflation, investment which produces fixed income, no matter how high, would appeal less to the majority of local investors as nobody knows for sure what the inflation rate for next year would turn out. If one is in a situation where inflation increases steadily every year, the prospect of holding an instrument which produces the same income every year seems increasingly less attractive as compared to investing in gold, equity or real estate which provide far more superior returns (normally much above inflation rate or inflation adjusted to some extent). The quality of mortgages is also an issue in itself. Housing and propery prices in Viet Nam has steadily and rapidly increased over the last decade together with a lack of sources for alternative investment. Real estate has consistently been attractive arbitrage and speculative venues. It is very common for real estate speculators to acquire several pieces of real estate (typical land, apartments or residential houses) through their personal connections or pure flipping, using those newly acquired properties as collateral to acquire even more. This practice partly supports the short- and medium-term lending practice which leads to inflated property prices and a speculative environment. As a result of this practice, in the mist of a real estate market meltdown, local banks in 2011 were left with a sizable portfolio of mortgages to liquidate, leading to a massive downward spiral of real estate prices in the market97.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!95 Jordan, (n 1), p. 18.!96 Vuong, Quan-Hoang and Tran, Tri Dung, Corporate Bond Market in the Transition Economy of Viet Nam, 1990-2010 (January 7, 2010). Working Papers CEB, No. 10/001, Centre Emile Bernheim, Universite Libre de Bruxelles, p. 20.!97 Lan Anh Nguyen, Taking a Bath in Vietnam Real Estate, Forbes Asia Magazine, 09 April 2012, (last accessed 19 July 2012) http://www.forbes.com/global/2012/0409/companies@people@ho@chi@minh@vietnam@taking@bath@real@estate.html.

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7.3. Consumer financing market The current state of the local market, however, is likely to change in the future with fast development of consumer credits and expansion of the middle class. One of the most rapidly expanding consumer lending practices involves credit card loans. With the large and fast expanding middle income population especially among the young office worker population with properly documented and high income earnings. The use of credit cards to make purchases takes off together with the popularity of online transactions and online stores (amazon is a very good example). Documentation in this sector are becoming more standardized with conditions for issuance of credit card becoming more relaxed over time. Although eligibility tends to vary from bank to bank, cash collateral with the bank is not normally a requirement anymore. Rather, banks tend to rely on evidence of a stable and regular income source (normally monthly salary) reaching a particular level as evidenced in the pay slip. Although this sector has a lot of potential in Vietnam for the near future, the high interest rates that banks charge for credit card loans (normally above 20% per annum) restricts widespread use of credit cards to some extent. 7.4. Public sector loans State-owned companies have been at the center of Viet Nam’s planned economy ever since the communist party took charge over the country. They are expected to represent the government’s invisible hands in the economy, assumes leading role in their respective industries, and guide the whole economy towards a sustainable economy with direction determined in advance by the communist government. These companies thus receive ample State support, both directly and indirectly, officially and unofficially through cash injections from the state budget, and soft loans from the Viet Nam Development Bank98. They also enjoy preferential corporate tax rates and receive tacit or overt State guaranty to gain access to overseas debt market99. These companies are also able to obtain very beneficial interest rates (much below current market interest rates) from State-owned commercial banks. And yet, they fall behind in the market competition with year on year poor performance and accumulate large losses. This sector represents significant portion of the loan market, and, unfortunately, makes up a large portion of local banks’ non-peforming debts. The poor performance of the State-owned company sector and their non-performing loans are expected to continue causing trouble in the local banking sector100. The latest example is Vinalines, the loss-making State-owned shipping giant who is expected to default on a large portion of its debts totalling around $2 billion, leading to the prosecution of its former CEO101. Another infamous default of the public sector was Vinashin’s default on its $600 million international syndicated loans in December 2010 and a number !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!98 Ngo (n 88). 99 ibid. 100 ibid. 101 Tuoi Tre News, New Manhunt for Maritime Leader Duong Chi Dung, 22 May 2012, (last accessed 19 July 2012) http://www.tuoitrenews.vn/cmlink/tuoitrenews/business/new-manhunt-for-maritime-leader-duong-chi-dung-1.72987.

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of local bonds led to yet another wave of prosecution of its former executives102. Default of companies in the public sector is not a new phenomenon in Viet Nam. Increasing public sector default has emerged recently amidst increasingly difficult economic climate even though the State has commited to a more transparent and sustainable economy. It is clear that receivables from this sector is not likely to make up the good quality cover pool assets of traditional covered bonds anytime soon. 7.5. Viet Nam Bond & Capital Market infrastructure

There are many issues pertaining to the Viet Nam bond market. One of the major issues has to due with its small market capitalization, which in turn affects liquidity. The local currency bond market is still rather small with total market capitalization of $15,6 billion (March 2011), 91% of which ($14,2 billion) is dominated by government bonds103. The size of the foreign currency market is about $2.4 billion with government issues taking up an even larger share at 96% of total issues ($2.3 billion)104. The majority of domestic issues are denominated in Viet Nam dong, the local currency105. There has been no precedent of a corporate issuer bankruptcy or default on repayment of interest and principal pertaining to a bond issue106 until the Vinashin international bond default in December 2010 leading to more precautions in the public sector bond market.

For Vietnamese investors, the introduction of covered bonds would create an interesting and new asset class with quality comparable to government bonds, but more attractive yield pick-up. However, investor appetite for covered bonds as a vanilla fixed income instrument is also an issue to be carefully calculated in bringing covered bonds to the local market. The Viet Nam market shows a tendency towards the traditional investment channels such as equities or fixed income instruments with equity characteristics (ie, convertible bonds or bonds with warrants) or real estate or gold. The reason is that these instruments guarantees a stable source of income over a long period with possibilities for participation in the upside of the issuer’s stocks. It should be safe to suggest that it was the equity part of the instrument that makes it more attractive to local investors as compared to a vanilla fixed income instrument. Investor’s sentiment is not likely to change over night and until then, covered bonds even as they are a very good asset class as they have been, needs the right time to gain traction. In a country with high rate of inflation (a year on year double digit inflation rate with inflation reached an all time high of over 20% in 2011) coupled with a weak and unstable local currency like Viet Nam, local investors traditionally look for a relatively short-term investment instrument with a potential for superior returns; or an instrument with high liquidity and strong price

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!102 John Ruwitch and Ngo Thi Ngoc Chau, Viet Nam jails former Vinashin executives after downfall, Reuters, 30 March 2012, (last accessed 19 July 2012), http://www.reuters.com/article/2012/03/30/vietnam-vinashin-idUSL3E8ER36Q20120330 103 Asian Development Bank, (n 36), pp. 96.!104 Ibid.!105 Vuong, Tran, (n 96), p. 10. 106 Asian Development Bank, (n 36), pp. 57 and 61.!

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fluctuation for speculative opportunities. This is where traditional high return, high risks instruments such as stoks, real estate, and foreign exchange/ precious commodities (eg, US dollars, Euros, or gold) come into play. This is especially true in the year of 2008, at the height of the global financial crisis, where outstanding corporate bonds experienced serious liquidity problems and new issues (even though from financially sound issuers) failed amist continuous prime rates adjustments and worsened investor confidence107. It was interesting, but painful, to see Hoang Anh Gia Lai, a local real estate conglomerate’s three year bond issue with 21% coupon rate failed at the time amist high sentiment for quick arbitrage opportunities in the stock market108. Instruments which show great capital appreciation potential in a relatively short period of time were clearly in favour109. The majority of local investors are not ready for long-term investments and the further development of the debt capital market in Viet Nam in the coming years will be very instrumental to the viability of covered bonds in the market. But until then, the instrument remains an interesting possibility. Lack of transparency is also an issue with the corporate bond market where, for example and except for international issues, the majority of corporate bond programs are announced with no information about the issuer’s listing schedules or listing plan110. Research also shows that the corporate bond market is dominated by a number of large and popular corporate issuers who are closely connected to the limited number of bond dealers (mostly banks and securities companies)111. Support from the bond dealers seems to be crucial for the success of any bond issue in Viet Nam. That is unlikely to change soon. And finally, the dominance of leading state-owned enterprises with explicit or implicit government guarantee backing has had the crowing-out effect on the overall market112. Small and medium sized companies have been finding themselves naturally shut out of the market. This also explains why only very large private companies were able to get access to the debt capital market. However, this area is subject to change at the moment amid poor performance and increasing default of public sector issuers113. 7.6. Credit Rating There are also a some other related issues peculiar with an emerging market similar to Viet Nam such as the absence of a local credit rating agency. Rapid growth of the debt capital market in the asia pacific region have long been believed to be assisted by a well-functioning of credit rating agencies, among other things114. Neibouring countries such as Thailand, Malaysia, China to India, Japan and South Korea all have their own active local credit rating

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!107 Vuong, Tran, (n 96), p. 21. 108 Ibid. 109 ibid, p. 23.!110 Ibid.!111 Ibid.!112 ibid, p. 21. 113 Ibid. 114!Shim, Ilhyock, Development of Asia-Pacific Corporate Bond and Securitisation Markets (January 1, 2012). BIS Paper No. 63c, p. 82.

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agencies, the majority of which are in the form of either a governmental innitiatives or joint ventures with global credit rating agencies115. Issuers and investors in Viet Nam have not enjoyed this luxury for a long time. There is neither a local credit rating agency nor any local subsidiary of foreign credit rating agencies in Viet Nam at the moment. The first ever local credit rating agency--Viet Namnet Credit Ratings Center--was established in June 2005 but closed its doors after just one year in operation116 at the height of the equities market. There is currently no plan for establishment of another local credit rating agency in the country. However, all major global credit rating agencies (Fitch Ratings, Standard & Poor’s, and Moody’s Investor Service) assign credit ratings for Viet Nam from time to time. Most recently, the country was assigned a BB- rating by Standard & Poor’s on June 6th, 2012117. No doubt this fact contributes to the fledgling nature of the country’s bond market and increases the costs of bond issuance to some extent. On the other hand, there is no obligation for the issuer to obtain credit rating for the issue118. That is, having the bonds graded by rating agencies are not a legal requirement for a bond issuance. It is optional for the company to obtain credit ratings for its public bond issuance and private placements. There has been no instance that a local issuer have assigned credit rating for its domestic bond programs from any credit rating agency. Most domestic bond issues in Viet Nam are not rated as a matter of local practice. However, international issues from Viet Nam are normally rated.

Even so, the role of credit rating agencies in providing investors assurances of the quality of a particular issuer or asset class cannot be overstated. This is especially true in the aftermath of the 2007 subprime crisis when, “investor distrust” of rating agencies are “extremely deep-seated” given the assigned overly positive ratings of various securitized programs misled their investment decisions119. Based on that backdrop and amist increasing investor demands for more transparency in the Pfandbrief market and relative independence from rating agencies, the Association of German Pfandbrief Banks launched the VDP Transparency Innitiative. The objective was to standardize the report that issuers have to make public periodicly regarding the cover pool assets and the volume of its Pfandbrief outstanding under § 28 of the Pfandbrief Act in June 2009120. The standardization focuses on the uniform layout, common format, the required data, and common understanding of § 28 of the Pfandbrief Act121. So far only covered bond legislation in Germany and Greece offers this level of legally enforceable transparency requirement in respect of cover assets for bond investors122. All reports from member banks will have to be centralized and posted on the VDP’ website

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!115!Ibid. 116 Asian Development Bank, (n 36), p. 13.!117 http://asianbondsonline.adb.org/vietnam.php, (last accessed 19 July 2012).!118 Asian Development Bank, (n 36), p. 13. 119 Bodo Winkler, VDP Transparency Innitiative, The Pfandfbrief 2010/2011, Association of German Pfandbrief Bank, pp. 53. 120 ibid, p. 54.!121 ibid, p. 56. 122 ibid, p. 53.

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(www.pfandbrief.de)123. The first publication started with the figures for the second quarter of the year of 2010124. This is certainly a step in the right direction. So far Vietnamese public bond issuers are required to publish regular information about the issuers such as auditied financial statements, annual reports and ad hoc reports125 on the SSC website126. Viet Nam has no experience regarding disclosure of information on the pool of assets backing a bond program. No doubt that is the result of the non-exisitence of secured bonds in the market. As a late beginner, it is clear that Viet Nam can benefit a lot from, among other things, the VDP Transparency Innitiative as well as the provisions of the German Pfandbrief Act. These ideas can work with not just covered bond programs but, say, securitization should the latter materializes earlier in Viet Nam (see Section 9). Of course, a simple cut-and-paste approach in regard of § 28 of the German Pfandbrief Act does not make total sense, and the government will need help from industry bodies such as the Viet Nam Banking Association127, or ultilize the SSC’s existing online website as the gateway for posting and accessing of information regarding the backing asset pool. Even if covered bonds issuance or securitization is not possible in Viet Nam at the moment, the VDP Transparency Innitiative presents an interesting idea which Viet Nam can learn in developing its own securitization or covered bond legislation in the years to come. 7.7. Miscellaneous Another issue has to do with the investor base for fixed income instruments. The investor base in local bonds is still rather small with commercial banks and domestic life insurance companies making up the largest bond investor group in Viet Nam. A number of authorized securities companies and market associations also participate128. Individual, retail investors normally do not invest in fixed income instruments except where they are tied with equity participation (eg, convertible bonds or bonds with warrants). Foreign holding in local bonds is also small althought, unlike the equity market, there are no restrictions on foreigners’ bond holding in the local market129. The final problem would involve the concept of bond trustees. There is not yet a clear concept of a bond trustee, bond holder representative, or a commissioned company (ie, an entity acting for bond holders) beyond mere definitions under current Vietnamese laws130. However, in respect of bonds issued to the public, the bond holder representative, a member of the Viet Nam Securities Depository, is authorized to have custody of the bonds and represent the interests of the bond holders131. Bond trustees seem to play a marginal role in the market at the moment.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!123 ibid, p. 56. 124 Ibid. 125 Chapter 3 of Circular 52/20120/TT-BTC dated 5 April 2012.!126 Section I.2 of Decision 515/QD-UBCKNN dated 25 June 2012.!127 http://www.vnbaorg.info/en/index.php. 128 Asian Development Bank, (n 36), Volume 1, Part 2, p. 19.!129 ibid, p. 28.!130 Asian Development Bank, (n 36), p. 58.!131 Article 2.1 of Decree 14/2007/ND-CP of the Government dated 19 January 2007.

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8. Offshore Bond Market - International Covered Bonds Recent research, from the success of structured covered bonds in South Korea, suggests that the investor base for covered bonds from new markets is “likely predominantly offshore”132 due to their diversification potential for investors from already established markets out of their traditional markets in today’s volatile world. Given the state of development of the local corporate bond market, local companies have been looking outside of the country for a cheaper source of finance. The most popular market of choice in the asia pacific region for Vietnamese issuers are obviously Hong Kong or Singapore. In June 2012, Vietinbank, the second biggest bank in Vietnam, successfully completed its senior, unsecured bond offering of $500 million in the Singapore stock exchange133. The issue was several times oversubscribed. Clearly there is an interest from outside investors for bond issuers from Viet Nam. The existence of off-shore bond markets benefits domestic issuers by providing them with access to large and more diverse funding sources. Competition from the off-shore bond market may also improve the efficiency of the onshore bond market. However, the off-shore market might also draw liquidity away from underdeveloped domestic bond markets, and slow their development. The experience of Vietnamese companies in dealing with these issues are still untested over a long horizon. For an emerging economy like Vietnam, the offshore foreign currency bond market is inherently more liquid and much larger campared to its domestic market134. No doubt a relatively small portion of the local companies/financial institutions are able to gain access to both offshore and onshore debt capital market, leading to access to new foreign currency and investor bases. However, local issuers’ ability to deal with the inherent issues in accessing offshore markets such as currency risks hedging/ managing will determine whether more number of them will be able to entering new markets in the future. This is still work in progress and the prospect for accessing the offshore bond market on a long term basis remains to be seen. For both domestic and international issues, even if covered bonds can be issued by a local bank in the future, they can be subject to rating risks associated with Viet Nam’s sovereign ratings135. This is due to the fact that in a country like Viet Nam, covered bond ratings can be influenced by unstable macro-economic conditions, a weak banking system, currency fluctuation and a lack of liquidity from time to time. These are the factors that affect Viet Nam’s own sovereign ratings, which in turn can also have negative effects on local issuers, the cover pool assets and the ultimate ratings of the bond themselves, and ultimately reducing the attractiveness of the instruments and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!132 Bank of New York Mellon, (n 87). 133 http://www.vietinbank.vn/web/home/en/news/12/vietinbank-listing-of-international-bonds-on-singapore-stock-exchange.html, last accessed 19 July 2012. 134 Shim, (n 114), p. 08. 135 Fitch Ratings, Sovereign Risk a Key Element in Covered Bond Credit Risk, 28 May 2012, (last accessed 19 July 2012), http://www.fitchratings.com/web/en/dynamic/articles/Sovereign-Risk-a-Key-Element-in-Covered-Bond-Credit-Risk.jsp

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increasing the cost of funding to some extent. This was the case of many European covered bond programs during the Eurozone sovereign debt crisis in the year of 2010 and 2011 when, according to Fitch, around 39 covered bond programs or 30% of the programs they rated were downgraded in consideration of the the liquidity risks following the respective sovereign downgrades136. 9. Regulatory outlook The Vietnamese government appears to recognize that there is a lot that they have to do to stabilize the economy and develop a sustainable but robust capital market. That is not something to achieve over night, but over a long period. On 1st March 2012, the Prime Minister issued Decision 252/QD-TTg to promulgate the Government’s plan for the development of Viet Nam’s securities market for the period from 2011 to 2020. The plan sets out a number of ambitious proposals to increase liquidity, transparency and sustainability in the local securities market. One of the proposals for the development of the corporate bond market was to broaden the variety of fixed income products to include those such as bonds backed by assets or guaranties, convertible bonds or bonds with warrants, and asset securitization137. Assets securitization was specifically mentioned to be developed incrementally through multiple steps. The government seems to be very cautious in the development of asset securitization. Decision 252/QD-TTg however did not specify the timescale to implement the proposals therein. Neither are there any specific details regarding how the high-level proposals regarding the introduction of asset-back bonds and asset securitization would actually be implemented. Although these are certainly a step in the right direction, one should not be overly optimistic as the proposals will be carried out over a rather long horizon (a nine-year period to the exact) and no one knows exactly what (ie, statutory covered bonds or contractual covered bonds or securitization) will happen first and in which order. At least it is reassuring that those issues have been under the government’s radar for sometime. In mid May and early July 2012, officials from the SBV mentioned in public media that one of the policy proposals the central bank is considering to recommend to the government was the establishment of a national bad debt trading company, wholly owned by the SBV, to refinance banks by acquiring their non-performing loans138. This company can be partly financed upto VND100 trillion (approximately $4.8 billion) through the State budget 139, or through, among other alternatives, asset-backed bonds issuance. Although just an idea for now, it was an interesting innitiative from the SBV. Everything needs a first start and one cannot help but hope that this preliminary innitiative will kick in a series of incremental developments towards a full development of

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!136 ibid. 137 Article 1.3 of Decision 252/QD-TTg dated 1 March 2012. 138 Ngoc Tran, Increasing capital flow to cope with bad debt, The Saigon Times, 30 June 2012, (last accessed 19 July 2012), http://english.thesaigontimes.vn/Home/features/general/24233/. 139 Experts Meet To Discuss Bank Sector’s Bad Debts, the Business Time, 10 July 2012, (last accessed 19 July 2012),!http://businesstimes.com.vn/experts-meet-to-discuss-bank-sectors-bad-debts/.

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asset securitization market in Viet Nam. Once a market is created, albeit small initially, it will draw interest from the private sector, which paves the way for a more comprehensive regulatory framework. All of these are crucial for the development of either statutory or structured covered bonds in Viet Nam at a later stage. 10. Conclusion Vietnam does not seem to be ready for this next wave of innovation in the capital market. Adopting covered bonds in Viet Nam may be a bit similar to the case of securitization in Germany back in the 1990s140 where, although not specifically prohibited under current legislation, there is no specific supporting rules and the instrument would have to resort to general rules regarding banks’ debt financing, corporate, secured transactions, bonds issuance and bankruptcy laws, among others. It seems a bit more difficult since Viet Nam does not appear to have even what Germany already had back in the 1990s to support secured transactions of this type. It is clear that attempts to bring covered bonds to Viet Nam would also bring a dilemma. The country did not or could not support securitzation which makes it difficult for them to adopt structured covered bonds given the lack of crucial infrastructure support for structured finance. For structured covered bonds, Viet Nam faces the same issues other civil countries (Germany, France, etc.) faced in bringing securitization as a common law instrument to a civil law jurisdiction. For statutory covered bonds, the fact that covered bonds have deep roots from a civil law jurisdiction doesn’t help but instead makes it even harder as they normally do not work without a special and dedicated legislation. It is clear that given this state of development, either statutory or contractual covered bonds will not work in Viet Nam. Real political willingness and initiatives have to come from the government first in enabling this type of instrument. The political drive to bring new financial innovation to the country’s fledgling financial market may be outrun amidst a variety of structural challenges within the economies to be addressed. Perhaps when Viet Nam has got all the right basics (ie, a more secure mortgage market, a more robust debt market, a more stable economic environment, and especially more modern legal infrastructure for structured finance) could covered bonds thrive as a sustainable source of finance and robust fixed income instrument. Viet Nam has resisted jumping on the securitisation band wagon, and securitisation has become increasingly unpopular in Viet Nam due to its role in the subprime crisis. The government, not the market, must be in the driver’s seat this time in determining which type of financial instrument to be introduced for the benefit of the country as a whole. To adopt a new set of legislation would be a long way, unfortunately, given the country’s rather complicated and timeconsuming law making process. Perhaps that is also a good thing as the country also needs time for its own debt and mortgage market to develop further so that law could meet what the market demands. But until then, banks may have to look elsewhere for a more legally and

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!140 Molen, Lina, (n 2), p. 201.!

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economically compatible instrument. Some authors suggested that sometimes missing one boat could be a blessing (linking between the titanic and securitization)141. That may be true in some cases. But one cannot afford to miss all the boats as that can be very expensive in Viet Nam’s path to modernization and development.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!141 Jordan, (n 1), p. 23.!

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