Vietnam

Vietnam needs action not words

The restructuring of Vinashin’s defaulted loan highlights failures in the state sector, yet FDI continues to flow.

Vinashin, a Vietnamese state-run shipbuilding firm that collapsed in 2010 owing billions to domestic and foreign creditors, may be on the road to rehabilitation after Credit Suisse recently brokered a government-supported loan restructuring that has a good chance of winning acceptance from creditors.

The deal, which was revealed in February, could demonstrate to investors that Vietnam is serious about fixing its problems. “This is the best deal that creditors are likely to get,” said a person familiar with the negotiations. “If the terms are accepted, then it should also pave the way for improved investor confidence in Vietnam. The restructuring is likely to be completed by this year.”

Vietnam’s problems started with its response to the recession in the late 2000s, when it unleashed a $100 billion stimulus package that flooded banks and state-owned enterprises (SOEs) with cheap money. Much of it was wasted on ill-considered ventures or simply found its way into private bank accounts.

The spending orgy came to an abrupt end when Vinashin collapsed.

During the second half of the 2000s, Vinashin had already achieved a dismal record of mismanagement, buying subsidiaries unrelated to its core shipbuilding business and weak financial controls. It raised the original $600 million loan in 2007 at Libor plus 125bp, and it was syndicated to about 25 banks, with Credit Suisse the biggest lender.

Mismanagement and worse led to the arrests of the firm’s chairman, Pham Thanh Binh, and five other officers in the summer of 2010, and then the company defaulted on a $60 million payment on the loan. Meanwhile, Vinashin had accumulated other local and foreign currency debts of at least $4.4 billion.

An outraged government told the company to sort out the problem and to forget about a bailout. There was a political dimension too. The prime minister’s rivals were able to use the many instances of mismanagement and corruption at SOEs as a potent tool against him. Accusations of cronyism were easily made, and fears of widespread moral hazard across the SOE sector could be rationally imagined.

“SOEs, with a few exceptions, are generally poorly managed,” said Michel Tosto, director, head of equities and fixed income at Viet Capital Securities. “We usually advise investors to invest in leading private companies and a few select SOEs, such as Vinamilk and some PetroVietnam subsidiaries.”

Last year, Vinashin’s five-member creditor steering committee put forward a restructuring proposal, but insisted on a coupon equivalent to the interest on the old loan. The company rejected the proposal and four of the committee members resigned, leaving Credit Suisse to carry on negotiations. In addition, the banks wanted some form of government support for any new deal.

However, the creditors always held a weak hand. Simply, “for the banks, a restructuring must offer a solution that is far preferable to Vinashin’s bankruptcy”, said the person familiar with the negotiations.

“The Vietnamese government has always in the past positioned the loan default and any re-structuring as a commercial transaction. On the other hand, the provision of a finance ministry guarantee for the new bonds indicates a policy compromise.”

Under the terms of the new deal, Vinashin’s loan will be exchanged for a 12-year zero-coupon bond, issued by a Vietnamese government entity, directly and irrevocably guaranteed by the Ministry of Finance. It will accrue simple interest at 1% a year until maturity and be priced at a yield similar to the Vietnamese sovereign bond issue, which trades at around 4%.

Vinashin needs approval from 50% of the individual lenders and holders of 75% of the original loan by value.

It is expected to win enough support to get the deal done, but Tosto is less sanguine about its transformative power. “The damage has already been done,” he said. “The default and failure to devise an early resolution has disillusioned investors in the SOE sector. The latest proposal, even if successful, will not be a game-changer. Confidence will take several years to be restored.”

As part of that effort, Nguyen Tan Dung, the Vietnamese prime minister, approved a master plan in late February that focuses on restructuring public investment, banks and state-owned companies.

The plan, covering the period 2013 to 2020, identifies the main institutional problems, but is short on detail. As in the case of other reforms promised in 2012, “it lacks details about implementation”, wrote HSBC analysts in a note on March 1.

The macroeconomic landscape is clearer. Inflation has slowed from a high of 23% year-on-year in August 2011 to single digits since May 2012. As a result of weakened domestic demand, imports slowed. For the year-to-date, Vietnam has a trade surplus of $1.7 billion, driven by a gradual rebound of textile and manufacturing exports. In 2013, HSBC expects “the bright stars of Vietnam to support a 5.5% expansion of GDP”.

Despite a notoriously volatile stock market, overseas portfolio investors are returning, evinced by $115 million foreign net inflows this year and a more than 20% market rally since the start of December.

Yet the market still trades at appealing multiples: at 12.9 times trailing earnings and 11.2 times forward earnings, and it also tempts with a high dividend yield.

RESILIENT FDI FLOWS
Vietnam also needs foreign direct investment (FDI) to grow. The country attracted investment pledges of $12.72 billion in 2012, down 22.4% from a year earlier, and disbursed $10.46 billion, which was 4.9% lower than 2011. But there were encouraging features about the composition of the FDI and the omens for this year are promising.

About 55% of last year’s FDI was Japanese, and 50% of the total was concentrated in the manufacturing sector, instead of wasted in real estate, which absorbed half of the foreign inflows during the hot years before 2008, said Tosto.

More than $280 million of FDI flowed into the country in January, a 74% year-on-year increase, according to the Vietnam General Statistics Office. There were 37 new FDI projects licensed, with total registered capital of $257 million, and nine existing projects increased their capital injections.

The processing and manufacturing sectors attracted the bulk of the flows, accounting for 72%, and the investment was spread across the country. Japan was the biggest investor, channelling $158 million into Vietnam, followed by Thailand ($54 million) and the old colonial master France ($20 million).

An especially heartening aspect has been the boost to the technology sector. Japan’s Fuji Xerox plans to build its first manufacturing facility in the northern port city Haiphong’s industrial park at a cost of $36 million. Meanwhile, Nidec Seimitsu, the world’s biggest mobile phone vibration motor manufacturer intends to build a $40 million factory in Saigon Hi-tech Park in Ho Chi Minh City.

The decisions by the Japanese companies follow investments by other multinational tech firms last year, such as Samsung Electronics, which is spending $830 million to develop its factory in northern Bac Ninh province, and Nokia, Intel and GE.

Vinashin’s loan restructuring may not be a catalyst for foreign investment, but maybe there was no need for one. Vietnam’s macroeconomic story seems sufficient to attract investment, although it is likely to avoid businesses too closely linked to the state.

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