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Bond Credit Rating System

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Table 1. Bond credit rating system


Ranking

Rating

Standard and

Poor's

Moody's

Investment ranking

Investment grade (high-grade)



Highest

Highest grade

AAA

Aaa

High

High grade

AA

Aa

Average height

Upper medium grade

A

A

Medium

Medium grade

BBB

Dad

Speculative ranking

Speculative grade (high - yield)



Low average

Lower medium grade

BB

Three

Speculative

Speculative

B

B

Short

Poor standing

CCC

Caa

High speculation

Highly speculative

CC

Song

Lowest, no interest

Lowest quality, no interest

C

C

Default

Default

D


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Bond Credit Rating System

Source: Financial Risk Manager Handbook 47 To obtain the above notation system, credit rating companies often rely on assessment factors such as: business (business lines of business, market and customer scope, technology and sales capacity, business advantages and weaknesses, business prospects, etc. to assess the business's operations); management (management organization, management staff capacity, business production strategy and plan, etc. to assess the business's operational capacity to achieve the goals and results that the business is aiming for); financial factors (the stability of the business's income, capital structure, payment capacity, ability to respond to market fluctuations, etc. to assess the payment capacity of the bond-issuing business). In general, the use of credit ratings has become a common practice in many countries, especially in the world's major financial centers. In some countries, credit rating has become a mandatory legal issue for bond issuance. Credit rating has been playing an increasingly important role in promoting the bond market of many countries and the international bond market. In Vietnam, although many authors have mentioned credit rating organizations in their works, affirming the role of this organization, in reality,

In fact, the development of this organization in Vietnam has not received much attention or focus.


47 Berrard J. Winger and Nancy Mohan (1991), Principles of Financial Management , Macmillan Publishing Co.

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Third, regulations on forms of corporate bond issuance.

Issuing corporate bonds, also known as offering corporate bonds, is the act of the issuer bringing bonds (goods) into the market. In general, the viewpoints in theoretical research works as well as in the laws of many countries in the world today indicate that corporate bond issuance has two forms: public issuance and private issuance.

In the book of author Moorad Choudhry, it is stated that: “Public offering is anyone can buy bonds. Private offering is where investment bank clients are offered through brokers or agents 48 . Author Walter Waschiczek's point of view: “Depending on the strategy and location, bonds are basically of two types: publicly issued bonds are bonds offered to a wide range of investors; privately issued bonds are bonds sold directly to a limited number of institutional investors” 49 . In the famous Law Dictionary Black's Law Dictionary, it is stated that public offering of bonds is the activity of offering bonds widely to investors with no limit on quantity 50 . In Vietnam, the general view is that public bond issuance is the process in which bonds are widely offered to all investors, individual investors and professional investors with the same conditions. Private bond issuance is the issuance method in which bonds are sold within a limited scope of a certain number of investors, without using mass media for the offering. For example, in the book Securities Market of the Academy of Finance, it is considered that "Private issuance is the issuance method in which securities are sold within a certain scope of investors (usually institutional investors) with limited conditions and not widely offered to the public. Public offering of securities is the process in which securities are widely offered to all investors, including individual investors and professional investors with the same conditions and time" 51 . In general, these views show that public offering and private offering differ in the scope of investors allowed to participate in purchasing, in which public offering targets the general investing public while private offering targets only certain customers and usually large customers.


48 Moorad Choudhry (2004), Corporate bonds and structured financial products , 2004, p.9.

49 Walter Waschiczek (2004), The role of corporate bonds for finance in Australia, Monetary Policy and the Economy 4, 2004, p.40.

50 Bryan A.Garner, Black's Law Dictionary, West Group (7th Ed ) 1999, p.1112.

51 Bach Duc Hien (2009), Stock Market Textbook, Academy of Finance, Financial Publishing House 2009, p.93.

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In fact, the choice of issuance form depends on the enterprise's ability and capital mobilization goals. Normally, enterprises choose the form of private issuance for reasons such as: the enterprise does not meet the standards to issue bonds to the public; the amount of capital needed to mobilize is not much so the enterprise does not choose the form of public issuance; the enterprise issues bonds to sell to a number of special investors to maintain business relationships. The nature of public bond offering is a wide offering to all investors, including professional investors and individual investors, with the aim of mobilizing a large amount of capital. When issuing bonds to the public, enterprises have advantages such as: mobilizing a large amount of capital; opportunities for the company to promote its name; opportunities for the company to find partners and sign business contracts; The success of the offering is more assured thanks to the participation of a reputable underwriter; etc.

The division of corporate bond issuance forms and the provision of criteria to demarcate the boundaries between them play a very important role in determining the legal regulations governing the operation of each form. Each form of bond issuance may differ in nature, number of investors, scope of issuance, method of disseminating information about the issuance, etc., so the content of legal regulation is also different.

Fourth, regulations on procedures for issuing corporate bonds.

Bond issuance involves the interests of many entities, the most important of which is the interests of investors. To protect the interests of investors, in addition to regulations on issuance conditions, the laws of each country also stipulate issuance procedures and require issuing enterprises to strictly comply. The procedures for offering individual corporate bonds and the procedures for offering corporate bonds to the public are different in nature, so the regulations on the offering procedures are also different. The procedures for offering corporate bonds to the public go through more stringent steps than the issuance of individual corporate bonds. In general, this sequence and procedure go through the following main steps:

+ Regarding documents related to the issuance

In this first step, for public issuance of corporate bonds, enterprises must carry out procedures to submit documents for registration of public bond offering; for private issuance of corporate bonds, the issuing enterprise does not have to submit documents for registration of private bond offering but only needs to prepare documents for bond issuance.

+ About information disclosure before the issuance

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The capital stock market is considered an information-sensitive market. Therefore, for the stock market in general and the corporate bond market in particular, information disclosure is a mandatory obligation for the issuing organization. Information disclosure before issuing bonds is an activity of the issuing organization that must be carried out in accordance with the principles, methods and deadlines strictly prescribed by securities law. This is to provide timely and accurate information related to the bond issuance plan and the issuing organization. Information disclosure plays an important role, not only helping to make the market transparent but also helping to create trust and influence the investment decisions of investors. This is an important factor that determines the success or failure of a bond issuance plan. Focusing on the general goal of the stock market is to make information transparent, protect the rights of investors, Vietnamese management agencies have initially had certain requirements on information disclosure for enterprises issuing securities in general and bonds in particular. In general, when issuing bonds, enterprises with the need to issue must develop a bond issuance plan and have it approved by the competent authority and disclose information to bond buyers. The plan must include basic contents such as information on business lines, financial situation, purpose of bond issuance, capital use plan, payment plan and method, etc. Therefore, issuing enterprises are obliged to disclose information on bond issuance according to the law so that investors have the necessary information before deciding whether or not to buy bonds from the issuer. Current Vietnamese law stipulates that in both cases of private issuance and public issuance, enterprises must fulfill the obligation to disclose information, but the level and method of information disclosure are different.

+ About bond distribution

This is the step in which the issuing enterprise will distribute bonds to buyers. There are 04 methods in which enterprises can distribute bonds to buyers, including: bond issuance bidding; bond issuance guarantee; bond issuance agent; direct sale to investors.

+ About the issuance results report

This is the step in which the issuing enterprise must announce information about the results of the issuance to bondholders and send the information disclosure to the Stock Exchange. The Stock Exchange then compiles information about the results of the bond issuance and announces the information on the corporate bond information page.

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Fifth, regulations on state management of the market.

State management of the stock market in general and the corporate bond market in particular is an indispensable activity to ensure an orderly, fair and lawful market. Market management is carried out through state agencies and self-governing organizations.

Regarding the management activities of state agencies, in each different country, the model of state management agency for the stock market will be different. Basically, there are two types of state management agency models for the stock market.

The first type assigns the main responsibility for state management of the stock market to a government ministry - for example, in Japan, this responsibility is assigned to the Ministry of Finance. In Japan, according to the provisions of the first legal documents on securities (the Financial Instruments and Financial Instruments Market Act of 1948), the Securities and Exchange Commission was established and has the same function as the US SEC because the Japanese Securities and Exchange Act of 1948 was built on the prototype of the US Securities Act of 1933 and the US Securities Exchange Act of 1934. Currently, Japan has abolished the Securities Commission and assigned the supervision and management of the stock market to the Ministry of Finance, and in some cases, the Minister of Finance is also allowed to exercise the authority to manage the stock market as an individual. However, in Japan, market management is assigned to a central regulatory agency: “In the Japanese market, the central regulatory agency is the Financial Services Authority (FSA), which performs the function of licensing corporate bond issuance, building a legal framework and supervising the implementation of services in the financial market in general” 52 .

The second type establishes a specialized agency independent of other ministries, directly under the Government to manage the state on the stock market (for example, in the US, there is the Securities Exchange Commission - SEC - Securities and Exchange Commission, abbreviated as SEC). In the US, according to the US Securities Act of 1933, the US Securities Commission is a federal agency responsible for enforcing the 53 Act . In this Law, one can find provisions on the registration of public securities issuance with the US Securities Commission, the authority of the US Securities Commission in not accepting registration documents, the authority of the Commission in case of detecting violations in registration documents;... Or according to the US Securities Exchange Act of 1934, the US Securities Commission


52 Section 2.3, Part II, Hanoi Stock Exchange (2016), Project on developing corporate bond market.

53 United States Congress (1933), Securities Act of 1933 , Sec 28[77z-3], https://www.sec.gov/answers/about- lawsshtml.html?fbclid=IwAR3WItOy9xbP605G7TNk0wLtG1w2kyp81JoEYbW9l9kQZVB6Q2gdfr4isCw#seca ct1933 , (accessed 11:30 p.m., May 20, 2020).

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The US was established in 1934, is a specialized, independent management agency with the highest power in managing the US stock market. The US Securities and Exchange Commission has authority over all aspects of the securities industry, including authority over the Stock Exchanges, Securities Depository Centers and other self-governing organizations (For example, the SEC has the right to issue regulations and rules on the stock market; has the right to inspect, examine and prosecute securities trading organizations that violate the law; grant or revoke licenses to Stock Exchanges, brokerage firms, traders, securities investment companies, etc.). In the content of this Law, it can be seen that the provisions on: the structure, organization, and authority of the US Securities and Exchange Commission over all participants in the stock market; Registration documents for issuance, periodic reports and other reports of the issuer submitted to the State Securities Commission;... In Korea, the securities market regulator is the Financial Service Commission (FSC): “The Financial Service Commission established under the Law on the Establishment of the Financial Supervisory Organization is an agency under the Government, exercising the highest level of management over the securities market. In the structure of the FSC, there are two specialized supervisory agencies under it, the Financial Supervisory Agency (FSS) and the Securities and Futures Commission for institutions participating in the securities market and organized trading markets (SFC)” 54 . In China, the model is more special. Specifically, on December 29, 1998, the Chinese Securities Law was passed, regulating the supervision and management of the securities market under an agency called the Securities Supervision Agency, which is a securities regulatory agency under the State Council (i.e. the Government) of China. This law was later amended in 2005 and retained the market management authority of the State Council: the securities regulatory agency under the State Council supervises and regulates the securities market according to the law 55 . Or: “The stock exchange shall supervise the time of securities transactions and report on abnormal transactions upon request of the securities regulatory agency under the State Council” 56 . In Malaysia: “The Securities Commission Malaysia is the focal point for main management. The Securities Commission Malaysia shall issue regulations on the issuance and trading of corporate bonds. In addition



54 Dr. Do Thi Kim Tien, Law on stock market supervision models in some countries in the world,

Inspection Magazine No. 10, 2016, p.54.

55 China Congress (2005), Securities Law of The People's Republic of China, passed 2005-10-27, effective January 1, 2006, Art 179, http://english.mofcom.gov.cn/article/policyrelease/internationalpolicy/ 200703/20070304466356.shtml(accessed 9:30 a.m. May 18, 2020).

56 China Congress (2005), Securities Law of The People's Republic of China, passed 2005-10-27, effective

January 1, 2006,Art 10, http://english.mofcom.gov.cn/article/policyrelease/internationalpolicy/200703/20070304466356.shtml(accessed 9:30 a.m. May 18, 2020).

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In addition, the Malaysian Securities Commission is also the agency that receives registrations and grants licenses for issuing corporate bonds” 57 .

Regarding the management activities of self-governing organizations, market management is carried out by social-professional organizations on securities. In the world, social-professional organizations on securities are often organized in the form of associations and there are many types of securities associations such as self-governing associations, trade associations, etc. The general trend of many countries in the world is to develop the type of self-governing associations and give the associations quite a lot of power such as: promulgating, managing and consolidating rules, properly implementing transactions on the market; having the right to reprimand, remove, fine or suspend the activities of members if the member's violations are serious; coordinating with the Government to give opinions and proposals to the Government on issues on the stock market to supplement and perfect laws related to the stock market; operating the decentralized market (securities that want to be traded on the decentralized market must be registered with the Association of Securities Traders); etc.

*Law on corporate bond trading market

Depending on the purpose, quality, and method of operation, in the corporate bond trading market, corporate bonds can be traded at the Stock Exchange or outside the Stock Exchange. Normally, the legal department regulating corporate bond trading activities at the Stock Exchange is considered the central part of the trading market. For corporate bond trading activities outside the Stock Exchange, the state can only carry out macro management, while specific management activities for this market model are undertaken by self-governing organizations. The content of the law on the trading market includes:

First, regulations on the type of corporate bonds traded – the market commodity.

Whether it is the TTPH or the TTGD, they are all parts of the TTTPDN. Therefore, the goods of both the TTPH and the TTGD are in principle the same, there is no difference. Any bond issued on the TTPH can be bought and sold on the TTGD.

The subjects of the trading market are corporate bonds that have been issued on the issuance market. After the bonds are issued, in order to be able to convert them into money when necessary, investors will bring the bonds to trade on the trading market. Therefore, in principle, any type of bond issued by a business on the issuance market can be traded on the trading market. However, due to the characteristics


57 Section 2.3, Part II, Hanoi Stock Exchange (2016), Project on developing corporate bond market.

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of the TTGD market, so based on the organizational nature of this market, the corporate bonds presented by the researcher in this section include 02 types: corporate bonds traded centrally at the Stock Exchange; corporate bonds traded non-centrally outside the Stock Exchange. The reason the researcher divides them like that is because bonds traded at the Stock Exchange must comply with different criteria than bonds traded outside the Stock Exchange.

Second, regulations on the subjects of the trading market.

Similar to the market for sale, the market for exchange needs entities to exist and operate. Both are parts of the corporate bond market, so the market for sale and the market for exchange have certain similarities in terms of market entities. However, due to their different nature, the entity structures of the market for sale and the market for exchange are also different. In the market for sale, the relationship between the entities is essentially a relationship of borrowing assets. Therefore, the main entities of the market for sale are the borrower (the enterprise issuing the bond) and the lender (the investors). In the market for exchange, the relationship between the entities is the relationship of buying and selling the issued bonds. Therefore, the main entities of the market for exchange are the investors. However, under the influence of the intermediary principle, in the market for exchange, investors do not directly buy and sell with each other but must go through intermediaries that connect them with each other. In addition, to buy and sell with each other, investors need a place to trade and that place must have an organizer and manager. Therefore, the subjects of the trading market studied in this section include: investors; intermediary subjects of the market, mainly studying: Securities companies - the most important intermediary in the trading market for both transactions at the Stock Exchange and transactions outside the Stock Exchange; Stock Exchange - the subject that organizes and manages trading activities in the market.

Third, regulations on the form of transaction organization and the order and procedures for corporate bond transactions.

Depending on the organizational form of the market, the form of bond trading will be different. Each form of bond trading is associated with different transaction procedures and sequences. Therefore, in this section, the researcher presents simultaneously the organizational form of bond trading and the sequence and procedures for bond trading on the trading center.

There are many ways for investors to buy and sell bonds on the trading market. For corporate bonds bought and sold through the stock exchange, the transaction form will be different from corporate bonds bought and sold outside the stock exchange. Although Vietnam is in the process of merging the two stock exchanges, up to now, investors can trade bonds on 03 exchanges (all 03 exchanges are managed by the stock exchange), namely Hanoi exchange, Ho Chi Minh City exchange and Upcom exchange. Bonds

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