Vietnam may end up paying for Vinashin's default 

WHAT DO WE think of when we think of Vietnam? Inescapably, of course, the war – which has shaped the country’s mindset in ways most will struggle to understand.

Perhaps the literary-minded will recall Graham Greene’s 1950s novel the Quiet American and its proposition that Vietnam would thrive not under colonialism or communism but under a “Third Force” based on a combination of local traditions.

Greene didn’t mention the bilking of foreign investors as one of those traditions. But overseas creditors of shipbuilder Vinashin feel, understandably, that they are being made to foot more than their share of the bill for the country’s international ambitions.

Back in 2005, Vietnam’s prime minister, Nguyen Tan Dung, outlined plans to boost the country’s maritime industry to 50% of GDP by 2020. He proposed rolling its 200-odd shipping companies into one entity – Vinashin – with the explicit aim of creating the world’s fourth largest shipbuilder.

So enthused was he by this grand scheme that he pitched up at a meeting with Standard & Poor’s, exhorting them to grant the fledgling Vinashin a rating in line with the sovereign.

S&P duly complied with this request, as did Moody’s, and Vinashin was able in 2007 to obtain a US$600m eight-year amortising loan, through Credit Suisse and with the help of a letter of support from the government pledging to support Vinashin both operationally and financially. Vietnam’s grand ambition to build a shipping giant seemed to be coming to fruition.

FLASH FORWARD TO 2010 and it all went wrong. That year the Vietnamese government announced that it had uncovered fraud at the company, without specifying how much money the fraud involved or where the cash had ended up.

It did say that the perpetrators of the fraud, Vinashin executives who had been investing in an array of non-core assets such as travel agencies, motor cycle manufacturers and real estate, had been punished. All well and good unless you were one of the creditors on the US$600m loan.

These, principally, were Credit Suisse, DEPFA, hedge fund Elliott Advisors and Maybank. Although they were heartened when Vinashin made an interest payment on the loan in June 2010, this comfort was short-lived as the company skipped an amortisation payment six months later. That month Moody’s and S&P downgraded Vietnam’s credit rating and at the same time suspended Vinashin’s rating. The loan went into default.

Vinashin then entered a consensual restructuring under the supervision of a creditors’ steering committee that was co-chaired by Elliott and DEPFA. But after nine months of tortuous negotiation came the punchline for the investors: Vinashin offered them 35 cents on the dollar, or (as if that joke weren’t funny enough) 13-year zero-coupon bonds with an implied net present value of 35 cents. As an investor you were asked to make your choice of jam today or jam tomorrow but there was far too little jam to spread around.

If Vietnam hopes to return to offshore capital markets, it would do well to avoid creating an unsavoury precedent

Faced with this choice, Elliott walked away from the steering committee and commenced litigation against Vinashin, with the case now before the UK courts on the basis that the loan was drafted under English law.

Elliott may well win a favourable ruling in the UK courts, but it is far from clear that any overseas judgement can be enforced in the jurisdiction where the assets are located.

BUT THERE’S A further twist to the tale, which should unnerve the management of Vinashin and the Vietnamese government. Two of Vietnam’s largest state-owned enterprises, Vinalines and PetroVietnam, are among the new owners of parts of Vinashin following a state-directed restructuring.

Having inadvertently ended up owning units that were among the guarantors on the original loan, the likes of Vinalines and PetroVietnam may be facing cross-defaults on their own loans.

That is a problem for PetroVietnam, which is sounding bankers for a loan to purchase US$1.5bn of Vietnamese assets put up for sale by ConocoPhillips. Vietnam’s government is said to be fretting that these stakes may end up going to the Chinese government, which would not sit well with Vietnam given the frequent spats it has with China over territorial waters and contested islands.

But if the loan would automatically go into cross-default because of the guarantee to Vinashin, PetroVietnam might find that its hands are already tied. All rather messy.

If there’s a moral to this tangled tale it is clearly that investors should exercise extreme caution when it comes to credit enhancements such as letters of support, and take credit ratings with rather a large pinch of salt.

The complication in the case of Vinashin is that the defaulter is, effectively, a sovereign state rather than a standalone enterprise. If Vietnam hopes to return to the offshore capital markets in the future it would do well to avoid creating an unsavoury precedent that could shut it out of that arena for good.