The UK High Court has reportedly given the Vietnam Shipbuilding Industry Group (Vinashin) the green light by to restructure its more than US$600 million of debt owed to global investors, coming more than two and a half years after the state-owned shipbuilder first defaulted on an international loan. And unlike Vinashin’s original loan, which had implicit backing by the government, the repackaged debt is expected to be guaranteed by the Ministry of Finance (MoF).
Nguyen Ngoc Su, chairman of the members' council at Vinashin, told Vietnamese media last week that the UK High Court accepted the company’s restructuring plan with 77% approval from creditors. If true, Vinashin’s group of international investors – which includes about 20 banks and investment funds – would see Vinashin’s debt convert into zero-coupon bonds with a 12-year tenor.
These bonds are expected to be backed by the MoF and will offer 1% internal rate of return, paid on maturity with the principal.
“Developments at Vinashin are largely symptomatic of problems faced by many state-owned enterprises [SOEs] in Vietnam, and so the government is stepping up in its restructuring efforts,” said Alfred Chan, an analyst at Fitch Ratings, noting that state-backed companies comprise about 40% of Vietnam’s gross domestic product. “If it turns out to actually guarantee this zero-coupon bond, it’s a sort of indirect way of supporting the company, assuming it is able to over time rehabilitate its financial position.”
News of Vinashin’s intention to restructure its debt – which includes US$600 million from a loan it defaulted on in December 2010 and US$23 million of unpaid interest - first surfaced in February of this year, though the approval process has taken time.
The move could put to rest a long-drawn saga that has weighed on the company, Vietnam and other corporates looking to participate in the global capital markets.
Much of the problem with Vinashin’s eight-year loan issued in May 2007 was the opaque nature of the support from the Vietnamese government in the event of a default.
In 2007, sole bookrunner and mandated lead arranger for the Vinashin loan, Credit Suisse, issued “comfort letters” to lenders who were considering Vinashin’s deal, supposedly to draw in global investors at more favourable prices. Yet the letter was not an explicit guarantee, so when Vinashin failed to meet its US$60 million loan payment in December 2010, there was little recourse for lenders to recoup their losses.
Vinashin’s woes heightened when former chairman Pham Thanh Binh was thrown in a Haiphong jail in March 2012, facing a sentence of up to 20 years, and eight other former executives at the company faced three-to-19-year sentences for their roles masking the company’s deplorable financial condition.
The series of events shut Vinashin out of the capital markets. It has not issued any debt or taken out syndicated loans since 2007, according to Dealogic, though it made several attempts to tap the bond market. And it hurt Vietnam’s own credibility as a sovereign guarantor.
“The status of the government’s support of Vinashin’s initial loan was quite gray, where legally it wasn’t really a guarantee,” said a Singapore-based credit analyst. “It wasn’t a very clear way to approach global investors, and now [the MoF] seems to have more appetite to guarantee the bond...It needs to be very clear about its support if it wants [Vinashin] to be credible.”
Analysts say that the MoF has been hesitant to bail out Vinashin’s for fear of promoting an environment of moral hazard among Vietnam’s state-owned and private companies, whose corporate governance standards have historically been questionable.
“You have to look at the circumstance of Vinashin’s default – it ran into financial difficulties because of poor corporate governance, got involved in non-core businesses and made poor investment decisions,” said Ivan Tan, a credit analyst at Standard & Poor’s (S&P). “Bailing out a company with poor governance might result in moral hazard. In particular the Vietnam government is trying to encourage more discipline and promote corporate governance.”
Yet the timing for the MoF to get involved in Vinashin’s business is improving. Since the company’s top executives were jailed in 2011, new management has strengthened Vinashin’s corporate governance policies and transparency, and the company has honed its focus on its main shipbuilding business.
Elsewhere, regulators have sought to improve Vietnam’s financial sector, replacing bank executives and creating ways for institutions to jettison their non-performing loans (NPLs) to improve their credit standing, which aims to strengthen Vietnam’s broader economic position.
“The fact that the government initially it stepped away from supporting this institution and is now coming back possibly indicates that selected sectors and high-profile SOEs are very important from an economic point of view,” said Chan, noting that state-backed companies comprise about 40% of Vietnam’s gross domestic product.
Yet while regulators are poised to aid Vinashin, analysts don’t believe they’ll make a habit of intervening. Tan notes that there have been two main avenues which Vietnam has contemplated in encouraging companies’ capital markets participation: first is to fully guarantee its SOEs’ activity. Second is to promote businesses that can operate without a government safety net.
Vinashin, which had been left fending for itself, indicates that the MoF is banking on the latter.
“The government has been tackling corporate governance and corruption issues, having bank chiefs arrested and taken company heads to task for mismanagement – those were deemed untouchable in the past are now being replaced and brought to justice,” said the credit analyst. “Vinashin is experiencing the same process, and the government is trying to inject more commercial orientation into its operations...[Regulators] are looking for managers who can deal with their mistakes, in line with the market’s commercialisation and, eventually, privatisation.”