Bloomberg News

Vinashin’s Binh Faces Jail After Debt Hurt Vietnam Rating

March 29, 2012

A Vietnam court is set to issue verdicts today on nine former executives accused of mismanaging the nation’s biggest shipbuilder that almost collapsed under $4 billion of debt and helped trigger a downgrade of the country’s credit rating.

Ex-chairman Pham Thanh Binh and eight other former executives of Vietnam Shipbuilding Industry Group and its units are charged with violating rules on economic management, according to an indictment. They could face as much as 20 years in prison. A separate investigation into embezzlement at a unit of the company, known as Vinashin, is also being conducted, according to the indictment.

Vinashin almost collapsed in 2010, blighting the country’s image among overseas investors as its failure to make payments on a dollar-denominated loan hampered Vietnamese companies seeking to sell debt internationally. The controversy sparked calls for a rare confidence vote in Prime Minister Nguyen Tan Dung, who had championed the shipbuilder. He accepted responsibility for the company’s “shortcomings” in a televised broadcast.

“This case has definitely made it clear to outside observers that there are some serious structural problems in the state sector,” said Eddy Malesky, an associate professor in the Graduate School of International Relations and Pacific Studies at the University of California in San Diego. “The good thing about it, is it has spurred renewed interest in getting a handle on state-owned enterprises.”

Packed Courtroom

The nine defendants appeared this week in a packed courtroom in the northern port city of Haiphong, flanked by police officers and initially shackled. They were responsible for losses totaling 910.5 billion dong ($43.7 million), according to the indictment.

Binh, chairman from 1998 to 2009, was responsible for 852.7 billion dong of those through his involvement in two power-plant projects and the purchase of a high-speed vessel, it said.

“Besides particularly large-valued state losses in terms of money and assets, the defendants’ violations also delayed production and business, badly affected the foreign investment environment regarding Vietnam’s shipbuilding industry, and negatively impacted workers’ lives,” the indictment read.

The former executives deny the allegations that they caused economic harm. Some said they were following Binh’s orders. Trinh Thi Hau, the only woman among the defendants, cried at her seat after presenting her defense.

Sacrificed Youth

Binh, 58, dressed in a suit jacket and sandals, and other defendants answered questions from a judge and prosecutors. Chu Dong, Binh’s lawyer, said the former chairman “sacrificed his youth” to develop the country’s shipbuilding industry and acted on behalf of the firm’s and state’s interests, not for personal gain.

Established in 1996, Vinashin expanded rapidly as demand for marine transportation surged and Vietnamese leaders bet the company would rival South Korean and Chinese shipbuilders. The company once counted hotels and a scooter business among its nearly 300 units as it diversified operations.

Vinashin was the sole recipient of $750 million raised in the country’s first dollar-bond issue in 2005, and had planned to build and export $1 billion of ships in 2009, a year before its debts brought it to the brink of bankruptcy. The company had over-diversified and failed to manage its cash flow and debt properly, the Ministry of Transport said in July 2010, the same month Binh was suspended during a government probe.

Government Support

Prime Minister Dung acknowledged “shortcomings” in managing the company at a legislative meeting last year.

Vinashin won government approval in November 2010 for a turnaround that included paring debt 38 percent and transferring units to other state-owned companies such as Vietnam National Shipping Lines and Vietnam Oil & Gas Group. Last year, the company asked holders of a local currency bond it defaulted on to write off as much as 90 percent of the money owed, bondholder Sabeco Fund Management said.

The failure to pay the first installment on a $600 million loan in December 2010 from a group of lenders headed by Credit Suisse Group AG (CSGN) sparked concern that the country’s state-owned companies might not receive government support if they had problems meeting debt obligations.

Vietnam’s sovereign credit rating was cut one level to B1 in December 2010 by Moody’s Investors Service, who cited factors including “debt distress at Vinashin” for the downgrade. Standard & Poor’s followed with a similar move later that month, placing Vietnam’s creditworthiness three levels below investment grade on a par with Bangladesh and Gabon.

‘Next China’

“When Vinashin was issuing debt and the government supported them, people bought into the idea Vietnam was the next China,” said Christian de Guzman, a Singapore-based assistant vice president at Moody’s, which has a negative outlook on Vietnam. “That sheen has worn off. Some investors got burned.”

Elliott Associates LP, one of about 20 creditors with a stake in the $600 million loan, dropped a lawsuit against Vinashin in a London court, Daniel Billings of Kreab Gavin Anderson, hired to represent Elliott, said March 27. The shipbuilder had missed three payments totaling $180 million, people familiar with the matter said in January.

The government has called for raising efficiency and competitiveness at state-owned enterprises. Prime Minister Dung in January told companies to submit restructuring plans, including the sale of stakes to private investors and disposal of non-core businesses. The ruling Communist Party said in December that “unprofitable or even money-losing” state-run companies had become a burden.

De Guzman of Moody’s said the agency’s negative outlook on Vietnam’s rating reflects “uncertainties” in the state-owned sector and the country’s bank-restructuring plan.

“The fact they’re trying to hold these people accountable is good. My hope is they don’t stop there,” De Guzman said of the trial. “Some SOEs continue to lose money and act as a risk to the government’s balance sheet. Actual reform still needs to happen.”

To contact Bloomberg News staff for this story: Nick Heath in Hanoi at nheath2@bloomberg.net; Diep Ngoc Pham in Hanoi at dpham5@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


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