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November 29, 2010

Vinashin woes have ripple effect

Developing shipbuilding countries hoping to be "the next Korea," or "the next China," might consider the woes of troubled Vietnamese shipbuilder Vinashin -- and their impact on the rest of the Vietnamese economy.

On November 19 Vinashin announced that it may delay the first $60 million principal repayment on a $600 million unsecured loan arranged by Credit Suisse in 2007.

Moody's Weekly Credit Outlook said today that "this is a credit negative for Vietnamese banks with significant exposures to Vinashin's debt."

"Because the debt-ridden conglomerate is 100 percent state owned," writes Karolyn Seet, Assistant Vice President - Analyst, "the market views its debt as backed by an implicit government guarantee. However, a delay in Vinashin's debt repayment will raise questions about the extent of government support to Vinashin, other SOEs (State Owned Enterprises), and Vietnamese banks."

"If there are long-term delays in debt repayment and a lack of government support, banks will be forced to restructure their loans to Vinashin, or eventually write off their exposures to the group, potentially eroding their capital."

The Moody's analyst notes that Vinashin had VND87 trillion ($4.4 billion) debt outstanding at the end of June 2010, and accounted for 4.5 percent of the country's gross domestic product in 2009. In the past several years, the company incurred huge losses with massive and ineffective investments. The seriousness of the matter compelled the government to intervene. In October, the prime minister replaced the head of the Vinashin group, who had been suspended in July and later arrested because of the group's debts. Since then, other senior managers were also told to step aside to allow a probe of the company's operations. The government was driven to publicly announce a vast restructuring of the group. Most recently, KPMG, the group's auditor, is in the process of being appointed as a restructuring advisor to the company.

The newly reorganized shipbuilder now only focuses on shipbuilding and repair, supporting industry development and training, and shipbuilding human resources.Its prior interests in ports, real estate, and other non-core business sectors have been transferred to PetroVietnam and Vinalines, two major SOEs that Moody's says are not viewed as being in financial difficulty.

"Vietnam's economy is still dominated by SOEs, especially in the industrial and banking sectors," writes Ms. Seet. "According to government data, SOEs contribute 40% to Vietnam's GDP, but only 44% of them are financially healthy. We estimate the banking sector to have between 25%-40% of loan exposure to the SOE sector, with joint-stock banks being exposed to a lesser extent. On a broader note, we believe the Vinashin episode shows that timely government support to both the corporate as well as banking sectors cannot be reliably assumed. More importantly, the episode raises further questions about the risk of further credit losses in loans to Vietnam's SOE sector."


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