Harassing Hanoi: Vinashin creditors paddle in uncharted waters as shipbuilder sinks in default

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For foreign lenders to Vietnam Shipbuilding Industry Group (Vinashin), the road to recoveries will likely require pressuring the government to intervene, Debtwire reports.

Crippled by mismanagement and alleged corruption, and burdened by more than USD 3bn in debt, the 100% state-owned company is unlikely to generate enough cash to service its unsecured USD 600m Credit Suisse-arranged loan any time in the foreseeable future. But to successfully exert political pressure, lenders first need to understand one thing: the government of Vietnam doesn’t technically owe them anything. Even before Vinashin defaulted on the loan by missing a USD 60m principal payment last December, some creditors noisily demanded that the government step in and bridge the shortfall. A “comfort letter” provided by the government when the loan was issued in 2007 constitutes an implicit guarantee, these creditors claim, and the cheap Libor+ 150bps loan was widely considered at the time as a quasi-sovereign debt. But although the state has taken an active role in restructuring Vinashin’s operations, it has washed its hands of any responsibility for the company’s debt, and direct talks between the company and lenders have been moving at a glacial pace. A “comfort letter” is not a guarantee, lawyers with experience in the country say, and the fact that creditors loaned money too cheaply doesn’t mean the government has to bail them out.

A steering committee of lenders formed last fall initially comprised Credit Suisse, Depfa Bank, Elliott Advisors, Maybank, and Standard Chartered, sources said. Elliott, an activist hedge fund, has a history of exerting pressure on governments in situations with quasi-sovereign credits, sometimes though media exposure, sources said. Standard Chartered resigned from the steering committee in April.

If the government doesn’t step in, creditors will likely face a protracted restructuring process in which recoveries hinge on the hope that Vinashin’s business will someday prosper. “The normalisation of commercial operations by Vinashin is going to be a real challenge,” said Matthew Flynn, managing director of shipbuilding consultancy Worldyards. Adding to Vinashin’s problems, overcapacity has been squeezing margins industry-wide and is likely to persist for several years, he said. Many economists say the government’s push to create a large shipbuilding industry was misguided from the start and driven mainly by politics, one person familiar with the business said.

So how do creditors, having foolishly lent Vinashin money at sovereign-debt prices, get repaid? “Harass the Vietnamese government,” said one lawyer with experience representing foreign investors in Vietnam. “The government is always telling everyone, ‘we’re open for business’. Even the Prime Minister goes on the roadshows with state owned enterprises (SOEs) saying the country is a friendly environment for investors.”

The key will be finding the right methods of harassment, three lawyers said,noting that there is no precedent in Vietnam for such a situation. Simply demanding repayment and publicizing the situation have yielded little beyond resentment. Some creditors have used the media to air their views that Vinashin’s default will scare off foreign investment in the state-controlled economy. But recent deals suggest that foreign capital is still available to Vietnamese companies -- if the deals are structured appropriately. Vietnam National Oil and Gas Group (PetroVietnam) in April obtained a USD 904m, export credit agency-backed loan from Bank of Tokyo-Mitsubishi UFJ, China Development Bank, Credit Suisse, HSBC and Intesa SanPaolo. Non-state owned conglomerate Hoang Anh Gia Lai closed a USD 90m high-yield bond this month.

Yet the creditors have a valid case. Vinashin was a long-running pet project of Prime Minister Nguyen Tan Dung, who has publicly admitted that a lack of oversight allowed mismanagement and alleged fraud to bring the 100% state-owned company to the brink of collapse. In light of this, the government’s claim that the loan is a purely commercial affair is somewhat disingenuous, the creditors said. Lenders have also objected to the government’s transfer of some Vinashin subsidiaries to other SOEs, claiming that this violates the terms of the loan agreement, especially since some of the subsidiaries are guarantors.

Rather than simply demand repayment, lenders should capitalise on options afforded by the loan agreement to pursue their claims, two of the lawyers said. The loan is governed by English law, and while an overseas judgment would be difficult to enforce in Vietnam where the company’s assets are located, creditors could interfere with or even seize overseas monetary transfers and letters of credit, one of the lawyers said. “They could basically make it impossible for Vinashin to do business abroad,” he said.

Lenders could also take the dispute to the London Court of International Arbitration, creditors said. Obtaining an arbitration award for the overdue debt would likely be simple, the second lawyer said. Making use of this in Vietnam would be more challenging. While there are cases of foreign arbitration awards being enforced in Vietnam, he said, “it’s usually been against foreign investors.” Seeking arbitration also requires support from two-thirds of creditors – which could be hard to achieve. A vote in March to call the subsidiary guarantees obtained support from only 54% of creditors, and Credit Suisse was among those that opposed the measure.

However, support for more assertive action will likely increase the longer the loan remains in default. Most of the loan is still owned by original lenders, many of which are commercial banks with an interest in staying on good terms with the Vietnamese government. Only about USD 100m of the debt is said to have been sold in the secondary market, one creditor said. But trading could pick up after June, when the next interest and principal payments are due, all the sources said. That’s because the need for further provisioning by creditor banks six months after default will likely increase the incentive to sell, especially if the interest payment is missed. The loan last traded in the 50-60 cent range, according to market sources.

Making their demands politically practical will also help creditors’ prospects, all the sources said. For politicians already under fire for their role in Vinashin’s rise and fall, providing an overt bailout could be disastrous, especially since the company has a large amount of secured debt to state-owned banks. If cash for repaying the USD loan does appear, it is therefore more likely to come from selling assets rather than from the state’s coffers, one of the creditors said. Exerting pressure behind the scenes on government officials restructuring Vinashin’s vast web of subsidiaries could therefore be more effective than waging a public fight, the second lawyer said.

Minimizing losses (and for investors that bought the debt at a discount, maximizing profits) on the Vinashin loan will require judiciously harassing the government while avoiding unnecessary provocation. The strategy used by creditors today will not only determine how much they lose or gain, but also set a precedent for future investors in Vietnam’s rapidly expanding but still uncharted capital markets.

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