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Why Elliott Drops Its Lawsuit Against Vinashin

By Hai Ly
Tuesday,  Thg4 17,2012,15:54 (GMT+7)
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Why Elliott Drops Its Lawsuit Against Vinashin

By Hai Ly

It is not by coincidence that the solution to Vinashin's problem emerges when the Ministry of Finance works more closely with global credit ratings agencies
Nguyen Ngoc Su, Vinashin’s chairman, is quoted as saying that the investment fund Elliott has dropped its lawsuit against Vietnam’s giant shipbuilder. Why so?

Before the lawsuit was initiated, Vinashin offered to repay its debt in cash. Under this offer, a big bank would purchase the shipbuilder’s debt at 35% of the initial loans (US$210 million), providing Vinashion with the much needed cash to tackle financial woes. Elliott Advisors and other creditors turned down this offer, contending that the purchase price was too low.

A local group has since stepped in and asked for similar prices but provided a more diverse array of repayment methods. This conglomerate boasts good ties with international financial institutions, especially giant investment funds, and is able to convince creditors to consider the offer. Creditors can retrieve part of the debt in cash, if they wish to, and get back the remainder via financial instruments that can be converted into cash after a while. It is possible for these creditors to recover more than 35% of the initial debt. In fact, if they are willing to wait for, say, 5-10 years, they can retrieve all the debt or even reap some returns. This condition is reasonable as the creditors themselves suggested in 2011 that Vinashin’s debt be turned into 15-year loans with a higher interest rate from the 11th year to the 15th year.

It also helps that the local group which comes to Vinashin’s rescue has immense financial and managerial capabilities and can immediately settle the shipbuilder’s debt. There is also much room for this competent conglomerate to establish fruitful partnership with Vinashin’s creditors, which stand to benefit significantly from the profitability and security of the financial instruments used in debt restructuring.

It is not by coincidence that the solution to Vinashin’s debt problem emerges when the Ministry of Finance works more closely with global credit ratings agencies. The National Treasury has even tapped into the service of a financial consultancy group after discussions with Moody’s and S&P. This will pave the way for local enterprises to optimize international bond issues and address demand for capital without relying on the Government.

Vietinbank has begun promoting the issue of US$500 million worth of international bonds after being granted the Government’s approval. Vietcombank, meanwhile, has gathered feedback from shareholders regarding its plan to issue US$1 billion worth of international bonds (whose term can be up to 10 years) in 2012. Once shareholders have given the nod, Vietcombank will seek approval from the State Bank of Vietnam. The Government will determine the actual amount of bonds issued.

It is vital to ensure Vietcombank’s bond issues succeed. To begin with, such success will help to quench the thirst for foreign currencies in Vietnam. The 2% interest rate ceiling imposed on foreign currency deposits and the appreciation of the Vietnam dong have made it difficult for banks, including Vietcombank, to meet demand for foreign currencies. Moreover, a positive outcome for Vietcombank’s international bond issues will, in addition to its strategic partnership with Japan’s Mizohu, attest to the local bank’s continued integration into the global capital market.

It seems that BIDV hopes to cash in on this market, too. Like conglomerates in the power, fuel and mining sectors, BIDV wants to issue international bonds, but these plans have been delayed due to unfavorable economic climate both at home and abroad.

The Federal Reserve’s low interest rates have made it easier for Vietnam’s financial institutions to mobilize capital abroad. Even then, risk premiums of 2.5-3 percentage points per year mean that these institutions continue to face crushing borrowing costs. It is therefore important to thoroughly tackle Vinashin’s debt to improve Vietnam’s credit ratings and enhance the reputation of domestic enterprises. At present, Vietnamese enterprises should try to set appropriate interest rates for bond issues. Borrowing costs will fall when the image of Vietnam’s business community is more polished.

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