Vietnam's Shipbuilding SOE may Re-emerge

Vietnam’s state-owned shipbuilding behemoth Vinashin, which navigated into a sea of red ink in 2010, leaving behind US$4.5 billion in debt and a flock of outraged creditors, may be about to be refloated, sources say.

The company itself, officially known as Vietnam Shipbuilding Group, remains a mess. It appears it will probably be downsized to focus on just ship-building, with the grandiose aim of becoming a world leader in shipbuilding put to rest. That would mean hiving off a flock of unrelated subsidiaries, which is going to take considerable time. It is also to be refloated in such a way as to stick the Vietnamese government with the risk from a guaranteed bond that muddies their debt distribution profile.

Observers say the workout may well set a precedent for similar corporate cleanups for the market. Vietnam’s domestic banks have historically rejected any calls for haircuts, making it a fairly important example. It does leave the international banks relatively unscathed out of a concern on the part of government officials that forcing them into losses on bonds and loans would damage Vietnam’s international credit standing, a significant loss.

Thus foreign creditors are expected to be issued bonds guaranteed by the Ministry of Finance that won’t mature for 12 years, with a balloon repayment at the end in 2025. Nonetheless the bond is hardly attractive, since it only yields 1 percent, although it was swapped to them at 100 percent of the face value of their existing exposure. International creditors could sell the bonds in the secondary market. They have been offered with yields of 7.1 percent, which would equate to roughly a 50 percent loss if they sold them off now.

The domestic market has largely reacted mildly to the restructuring reports. Another SOE, Vinacomin – Vietnam National Coal and Mineral Industries Group – sold 5 trillion Vietnamese dong (US$237.2 million) worth of bonds recently that apparently were oversubscribed although bankers say there is too much liquidity in the market so the banks, the only real buyer of bonds, had to park their money somewhere.

In its heyday, Vinashin built an estimated 80 percent of Vietnam’s shipping, both merchant and military, and operated ports as well. It employed 28,000 Vietnamese when it went under. Established only in 1994, it had an additional 10 shipyards under construction when its huge burst of expansion came to a skidding stop.

After the dust settled, it transpired that overly ambitions officials had moved Vinashin far beyond its shipbuilding remit into securities, aviation (in a deal with Indonesia’s budget carrier Lion Air), and property. When Vietnam’s property market came apart in the middle of the global financial crisis, so did Vinashin. It faced additional problems as new build contracts died and contracts were cancelled. The order book that Vinashin had used as proof of its financial viability largely disappeared.

The company’s boss, Binh Pham Than, was eventually reprimanded and later jailed along with several other Vinashin executives. Some received 20-year jail terms and have since faced additional charges and sentences.

If anything, Vinashin was more a symptom of Vietnam’s once hyperventilating economy and its collapse than a cause. As it transpired, the government had poorly policed its transition from Communist command economy to putative Asian neo-tiger.

With a mountain of nonperforming loans, the government was forced to establish a Debt and Asset Trading Company to take on nearly US$5 billion in bad debt – including the restructuring of Vinashin – in bad debt in the effort to overhaul the banks.

The State Bank of Vietnam chief Nguyen Huu Nghia was quoted by Bloomberg in May as saying lenders with NPL ratios of 3 percent or more would be required to comply. Vietnam’s state-owned enterprises, whose corruption and inefficiency feed the Communist Party. turned in disastrous performance after disastrous performance.

Duong Chi Dung, the chairman of Vietnam National Shipping Lines – known as Vinalines – made headlines when police issued a nationwide arrest warrant for him in 2012 after the company racked up losses equivalent to US$81 million and 40 Vinalines vessels were detained in China, India and Japan. Other SOEs including Vietnam Coal and Mineral Industries Group and Vietnam Electricity Group were also found to have committed serious violations.

The Vinashin cleanup, however, is regarded as a one-off effort to fix one particularly vexing problem, involving as it did foreign creditors. No other SOEs are in the same position although several are in trouble and need of being restructured. Troubles in such firms as the former Vietnam Electricity, now known as EVN, are more structural, from a policy point of view, because they cannot sell electricity at a realistic price to cover costs.