Vinashin Exchanges Debts for Bonds

Posted on April 10, 2013

Vinashin has reached agreements on credit restructuring with 51 percent of its debt owners, who hold 75 percent of the total debts.

Accordingly, Vinashin will issue US$623 million of bond guaranteed by the Vietnamese Government with 12 year maturity, interest rate of 1 percent per year, paying off principal and interest at maturity-end. That means after 12 years, Vinashin or the Government (in case Vinashin cannot pay) has to pay totally US$697.76 million for Vinashin bonds holders. Many of its debt owners see this investment “a bargain” if it is well exploited.

Attractive investment?

Mr Nguyen Manh Hai, Director of Auditing Company AVA, said: “Vinashin has elaborated a successful solution of debt restructuring when getting debt owners’ agreement. It is a familiar solution in financial markets. It is a bargain for primary debt owners because they will surely be paid after 12 years with the guarantee of the Government. With new debt owners who buy Vinashin bonds at a low price, for example 30 percent of par value, they will receive considerable profits (nearly 11 percent per year), if they buy at price of 20 percent of par value their profits will even reach 15.8 percent per year, which makes it attractive investment.

According to Mr Cao Sy Kiem, Member of the National Monetary Policy Committee, Vinashin’s bond issuance will push up its debt restructuring particularly, and that of banking system generally. Debt owners forecast that after solving Vinashin’s domestic debts, Vietnam probably will also help solve international bad debts of this corporation. It is likely that Vinashin will issue new international bonds to exchange bad debts.

It is known that with the support of Swiss Credit Suisse, in June 2007, Vinashin issued 8 year bonds of US$600 million. Bond purchasers are Vinashin’s debt owners. They can sell these bonds in the market to others who become new debt owners of Vinashin. Therefore, the number of debt owners and bonds’ market value can alter depending on time or especially on Vinashin’s creditworthiness. After Vinashin failed to pay off principal of US$180 million and interest of US$23 million in late 2010 and early 2011, its bonds’ market value dropped considerably. Debt owners sold out Vinashin’s bonds to other investors.

So will Vinashin pay off at due bonds that it issues in 2013? Many investors are still in doubt about the possibility of Vinashin paying in time. However, to many others, this is “a gamble”, the interest rate of 15.8 percent is very attractive in the context of declining banking interest rates. However, risks always accompany profits, therefore this is still an investment opportunity for many investors.

Vinashin’s overdue loans are classified into bad loans with risk provisioning by banks and financial companies. Risk provisioning rates vary from bank to bank, however risk provisioning has reached thousands of billion VND. It is hard to calculate what proportion of Vinashin debts was guaranteed.

Comprehensive solution package

Currently the Finance Ministry is elaborating a solution of exchanging old debts for new bonds. However the exchange rate is, this solution is not different from paying 25 percent of total debt by bonds. The problem is that if the exchange rate is too low, debt owners will get damaged. Instead, a comprehensive solution package including paying a part by bonds, another part according to new mechanism in a fixed time, other parts by rescheduling debts, seems to be a proper solution, because every exchange resulting in unreturned borrowed money forces debt owners to classify these loans as lost ones – the unwanted scene for financial companies.

And what about other companies, do they cross off debts for Vinashin? According to the financial report audited by Deloitte on 30th June 2012, total loans that PetroVietnam Finance Joint Stock Corporation (PVFC) gave to several companies affiliated to Vinashin are VND1,069.4 billion, to those affiliated to Vinalines are VND80.97 million, equivalent to VND1,686.5 billion.

According to auditing company Deloitte, based on the written direction of state management agencies on restructuring debts of Vinashin, PVFC has maintained current debt condition of Vinashin since 2009, not establishing additional loan provision for several companies affiliated to Vinashin.

Besides PVFC, how many other banks are pitifully restructuring loans of Vinashin without loan provisions? What is the real number of overdue and bad debts in banking system?

The facts show that many commercial banks have not established provisions for loans of Vinashin. The insolvency of HBB causing its merger into SHB despite its announced bad loan rate is an alarm.

According to Deloitte, Oceanbank’s financial reports show that: “At the end of 2011, Oceanbank holds overdue deposits, loans and bonds of Vinashin and its subsidiaries. However, in compliance with state management authorities, the bank maintains current loan condition without establishing loan provision. Currently, Oceanbank is working with Vinashin and competent state management authorities about solutions.”

Dr Tran Tien Cuong, former Head of Enterprise Reform under CIEM, said that because of decentralization, no authority is responsible for enterprises’ activities. They are supervised only when there is problem, therefore negatives and losses are not detected. Another problem is that even when there are regulations, enterprises that do not comply are not reminded or urged with clear sanctions. In the end, whether the banking system makes loan provisions or not, not only they suffer from overdue loans of Vinashin.

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