Methods and Legal Issues in Debt Refinancing by Vietnamese Local Subsidiaries

This article explains in detail the main methods of debt refinancing available to local subsidiaries in Vietnam, and the legal points Japanese companies should keep in mind, including SBV registration, tax, accounting, and contract practice. It also covers how refinancing differs from intra-group lending and how it can be used as part of a broader fundraising strategy. NEXORA LAW FIRM has extensive practical experience supporting intercompany loans, debt restructuring, and refinancing schemes in Vietnam, and has particular strength in designing structures and drafting contracts that comprehensively account for legal, tax, and foreign investment considerations.

As Japanese companies conduct their business activities, deteriorating financial conditions or shifts in market environment can sometimes make it difficult to repay debt. In such situations, to avoid credit risk and the risk of enforcement of conditional obligations, Japanese companies typically consider and pursue refinancing or other methods. Debt refinancing is an important tool for Japanese companies to restore financial soundness and sustain their business operations. However, each method carries its own inherent risks, so careful planning and execution are required. This article addresses the main refinancing methods available in the Vietnamese market, together with the related legal points to watch for.

01 - Repaying Existing Debt with New Borrowing

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Borrowing from Outside Vietnam

To repay an existing debt by taking out a new loan from outside Vietnam, approval of the fund utilization plan by the competent authorities is a precondition. New borrowing often comes with higher interest rates and stricter screening conditions than the existing debt, which tends to increase the overall cost of funding. In addition, loan agreements commonly include provisions protecting the lender's rights, which may restrict the company's freedom of action (particularly where the lender is a bank or other third party).

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Domestic Borrowing

It is also possible to use domestic borrowing within Vietnam, but such borrowing is permitted only where the purpose is early repayment of existing debt, and only where the following two conditions are met:

(i) The repayment term of the new loan does not exceed the remaining term of the existing debt.

(ii) The repayment terms of the existing debt have not previously been changed through refinancing or otherwise.

Domestic borrowing in Vietnam can sometimes offer relatively low interest rates from banks, but because collateral requirements and the screening process are strict, it may not be easy for Japanese companies or individuals to access.

*Specifically, Vietnamese commercial banks do offer very attractive rates—for example, some banks have offered new borrowing at around 6-7% per annum, compared with existing domestic borrowing rates of 11-12% per annum. However, securing such low-interest new financing is by no means easy. For Japanese companies and individuals, the borrowing process is often very difficult, for reasons such as the following:

(i) Suitable collateral assets are required.

(ii) Early-repayment fees are high (typically 3-4% of the amount repaid early).

(iii) The burden of other costs is substantial (asset valuation fees, notarization fees, collateral registration fees, mandatory insurance premiums, etc.).

Because of these factors, the cost of new borrowing increases, and individuals and Japanese companies often find themselves, in effect, "avoiding one difficulty only to run into another." In other words, despite considerable effort, the cost of new borrowing frequently turns out not to differ significantly from the cost of the existing borrowing.

02 - Rescheduling the Repayment Deadline

Rescheduling the repayment deadline is carried out, based on negotiation and agreement between the lender and the debtor, through one of the following methods:

- Revising the installment schedule: extending the repayment deadline for part or all of the principal and interest.
- Extending the repayment period: readjusting the repayment period for principal and interest beyond the deadline set in the existing contract.

Implementing this method requires the lender to assess the debtor's creditworthiness and confirm its repayment capacity. In many cases, agreement must also be reached immediately before, or within 10 to 15 days after, the repayment due date.

03 - Settling Debt with Substitute Assets

Companies in certain industries (real estate, oil, financial instruments, etc.) can settle debt using highly liquid assets. For example, a company might monetize real estate and use the proceeds to reduce its liabilities. This method, however, carries the following risks:

- The risk of a loss where the appraised value of the asset falls below its market value
- The time and cost involved in liquidating the asset

04 - Applying for a Reduction or Waiver of Interest or Fees

In intra-group financing or transactions between a parent and subsidiary, a reduction or waiver of interest or fees may be granted. Where funds are raised from an external source such as a financial institution, however, protecting the lender's interests generally takes priority, making refinancing on such favorable terms difficult. Companies need to plan their negotiation strategy with the lender in advance and prepare to explain the rationale for the refinancing.

05 - General Points to Note

In the course of debt refinancing, the following legal and financial risks should be taken into account:

(i) Compliance: The refinancing plan must be carried out properly in accordance with Vietnamese law.

(ii) Maintaining creditworthiness: A strategy is needed to minimize the impact of the refinancing on the company's credit rating.

(iii) Involvement of professionals: Obtaining advice from lawyers and financial consultants helps avoid legal risk and design the optimal refinancing plan.