Vietnam Loses Glow as a Market Darling

Until a few years ago, Vietnam was one of the world's hottest emerging markets. Now it faces an urgent task: fix a beleaguered banking system or watch its economy continue to slip behind faster-growing neighbors.

Piles of bad loans following the financial crisis have dragged down growth in Vietnam and left banks weakened and reluctant to lend.

The government recently acknowledged that nonperforming loans—many made to inefficient state-owned companies—could be as high as 10% of the banking system, substantially higher than reported by individual banks. Fitch Ratings analysts think the number is as high as 15%.

A record number of firms are declaring bankruptcy, and in the sprawling urban areas encompassing Hanoi and Ho Chi Minh City, the landscape is littered with stalled construction projects as builders run out of cash or put on the brakes as demand for condominiums and office space dries up.

Vietnam fought off rumors in recent days that it was seeking an International Monetary Fund bailout for its banking system. An IMF spokeswoman said no requests for aid had been made. State Bank of Vietnam Deputy Gov. Le Minh Hung said in a statement on the government's website that the country had no intention of seeking a rescue.

However, the IMF and others have been advising Vietnam on how to implement a domestically financed bailout that would restore its banks to health. In its latest economic review the fund said that "quick and comprehensive action" was needed to solidify weak banks and put the economy on more solid ground.

Fears over Vietnam's banks intensified in August when one of the country's most prominent tycoons, Nguyen Duc Kien, was arrested for allegedly improperly lending money to real-estate projects. Efforts to reach Mr. Kien, who now runs a number of private investment funds and owns Hanoi's main professional soccer club, have been unsuccessful. Stocks dropped in the days following the arrest, and the Ho Chi Minh Stock Index is down 18% since the beginning of May.

Vietnam shares fell 2.2% Monday, led by selling in property-related stocks after state media reports suggested real-estate developers are trying to cut prices to boost sales of apartments.

Song Da Thang Long Joint Stock Co. is among the local developers that have struggled. In July it secured an additional loan of 300 billion dong, or around $14 million, from the state-owned Bank for Investment and Development of Vietnam to help complete its sprawling, 13-tower U-Silk City development in Hanoi's suburbs. The project began in 2009 at the height of Vietnam's property boom but quickly fell victim to the subsequent property slump and soaring interest rates.



Some question whether this cash injection is enough to keep the project alive, and Song Da Thang Long's stock price has fallen about 60% in the past six months. Chairman Nguyen Tri Dung has said the firm is trying to arrange additional credit lines with other lenders. He couldn't be reached for comment.

Economists warn that Vietnam has entered a dangerous cycle where banks, saddled with bad debts, are unwilling to lend, making it harder for businesses to invest. That feeds into slower growth, which in turn makes it harder for companies to pay back loans, again harming the banks.

The result is that Vietnam's economy is likely to grow below its potential for years to come, unless stronger steps are taken to clean up the banks, economists say.

"I don't think there's any quick fix to a problem like this, as you see in the West. It takes time to work through a solution" to a banking crisis, says Gareth Leather, an economist at Capital Economics. He figures Vietnam's economy will grow at closer to a 5% rate in coming years than the 8% the country enjoyed through much of the previous decade. Although higher than growth rates in the West, 5% is considered slow for a developing Asian country like Vietnam and might not be fast enough to generate sufficient jobs to keep its growing population employed.

The government this month revised its forecast for 2012 growth down to 5.2% from 6% previously.

Vietnam's leaders have acknowledged that a fix is needed. Prime Minister Nguyen Tan Dung in March approved a three-year restructuring plan for the banking sector designed to strengthen the country's largest banks and encourage a series of mergers among smaller lenders, but officials appear uncertain about how to put the blueprint into effect.

Plans to launch a "bad bank" to buy up distressed assets have been discussed, but a foreign investor familiar with government discussions say implementing such a solution is being delayed by Hanoi's lack of expertise in managing a modern banking system.

People familiar with government plans say there are proposals to let foreign banks increase stakes in domestic banks from the current cap of 20% in some instances to as high as 49%. Another plan would allow majority stakes, but with a time limit of five years, after which the foreign banks would have to divest.

Government officials didn't respond to requests for comment.

It isn't clear if foreign banks will be interested in increasing their commitments without having the influence of being a permanent majority owner. There are more than a dozen foreign banks with stakes in domestic banks, including HSBC Holdings PLC, Australia & New Zealand Banking Group Ltd. and Société Générale.

Many of the foreign banks are dealing with troubles at home, and are said to be reluctant to double-down without assurances of more control over local partners. One foreign banker said at least some of the foreign banks are looking to exit Vietnam at the right price, rather than put more money in.

While the banking situation has deteriorated, Vietnam has tackled other problems by taming double-digit inflation and stabilizing its currency, in part through interest-rate increases. Vietnam has relatively little foreign debt and its trade deficit has shrunk this year.

Some think the government might be able to afford to run a bailout of its banks by itself. The government's debt-to-GDP ratio is about 44%, and the annual budget deficit has fallen to less than 4% of GDP last year from 9% in 2009, well below levels of financially strained economies in Europe.

But because of the large role the state plays in industry, the government has so-called contingent liabilities to back up debt in state-owned institutions. Fitch Ratings figures those liabilities equal an additional 10% of Vietnam's $125 billion GDP.

In the meantime, investors are waiting for more action to resolve the banking situation. Louis Nguyen, chief executive of Saigon Asset Management, which invests in a broad range of Vietnamese companies, said his firm tried to launch a fund last year in conjunction with a large Vietnamese bank to invest in problem loans.

But the fund was put on hold when he found the banks were unwilling to acknowledge problems on their books and sell loans at any sort of discount to their face value.

Source: http://online.wsj.com/article/SB10000872396390443779404577643220089349912.html?mod=googlenews_wsj

China Buyouts Come Into Focus

Thank Muddy Waters for China's biggest ever buyout. The short-seller's attack on Nasdaq-listed Focus Media triggered a proposed $3.7 billion offer from the company's chairman and a bunch of private-equity firms, including Carlyle.

But the attack was last November. The offer was announced in August. It will be weeks before the potential buyers know if they've been successful. That's about a year since the company's American depositary shares fell by two-thirds after Muddy Waters said the advertising display company owned fewer panels than it claimed—allegations Focus Media refutes.



What's taken so long?

The logical conclusion of a wave of short-seller reports slamming U.S.-listed Chinese stocks was that a wave of going-private transactions would follow, as company insiders, backed by PE firms, bought the businesses at deflated prices with the aim of relisting later, probably in Hong Kong or Shanghai. That's happened, but at a gentle trickle—not a tidal rush.

The Focus Media example shows investors aren't quick to jump to the buyout route. For starters, insiders who have faith the shares will bounce back are reluctant to delist. (Focus Media's shares have regained much lost ground in recent months.)

Then there are minority investors. Delaware incorporated companies going private almost certainly face a lawsuit from investors alleging they're being bought out too cheaply. At Focus Media, a Cayman corp., some minority shareholders are kicking up a fuss, saying the $27 per share offer is too low—though it's 6% above the price before Muddy Waters' report.

Litigation can cause delays, more fees and uncertainty. A deeper concern though is accessing debt to support the buyout. The Focus Media proposal includes about $1.6 billion of financing from Citigroup, Credit Suisse and Singapore-based DBS. They've provided letters saying they're "highly confident" of funding the deal. But final approval means persuading credit committees that Muddy Waters was wrong and that they can get their cash back.

Finally, there's the exit strategy. An IPO would be tough until equity markets pick up, and an onward sale—through a listing or to another buyer—means polishing up a tarnished reputation too. Simply put, a big impediment to a surge in going-private deals may be that mud tends to stick.

Source: http://online.wsj.com/article/SB10000872396390443819404577632810235688038.html

Private equity’s mega-deals: Too big to veil

CRITICS predicted the largest private-equity deals would end up like the giant python in Florida, which exploded in 2005 after it hungrily devoured an alligator. During the 2006-07 bubble, buy-out firms hunted iconic companies at sky-high prices with oodles of borrowed money. Then the economy turned. Boston Consulting Group forecast in 2008 that the majority of companies owned by private equity would default on their debts.

A look at the 20 largest deals, however, shows that most will turn out better than predicted. In June KKR agreed to sell a 45% stake in Alliance Boots, a British pharmacy chain, for $6.7 billion to Walgreens, which has the option to buy the rest in three years. If this happens, KKR will make 2.2 times its money. Kinder Morgan, a pipeline operator owned by Carlyle and three others, did an initial public offering (IPO) last year; the owners may triple their money. Even Hilton, a hotel chain bought by Blackstone at the peak of the bubble, could defy the doomsayers. The investment could be worth 2.5 times the initial value when Hilton goes public.

There are, of course, some carcasses. The 2007 leveraged buy-out of Archstone, a property company, by Lehman Brothers and Tishman Speyer was a disaster and is partly blamed for Lehman’s demise. The biggest buy-out in history is a spectacular failure: TXU, a Texan utility owned by KKR, TPG and Goldman Sachs, has suffered from a huge debt load and falling gas prices. The question is when, not if, it will file for bankruptcy.

What determined whether these deals flew or flopped? Companies in recession-resistant industries performed better. So did deals done before the peak of the bubble in 2007, says Colin Blaydon of Dartmouth’s Tuck School of Business: they were cheaper and had less debt. Swift pay-outs were key too. Blackstone sold most of Equity Office Properties immediately after its 2007 buy-out, which helped it pay down debt. When possible, private-equity firms piled on more debt to pay themselves early. By the time HCA, a health-care firm, went public in March 2011, its buy-out owners had taken out nearly enough in dividends to recoup their investment.

Low interest rates, however, are why most deals have avoided bankruptcy. Private-equity firms have been able to refinance, and yield-starved investors have given some of these deals a second life.

Two boom-era phenomena, “covenant-lite” debt and “payment in kind” loans, also helped. The former made it hard for creditors to force the company into bankruptcy, and the latter enabled firms to pay off creditors with new debt instead of cash. Private-equity firms have managed to push back the “wall of debt” that critics thought would crush them this year or next. Many do not see significant debt maturities until 2016 or later. With any luck they will already have offloaded their companies onto the public market by then.

 

Several companies have technically defaulted but restructured behind closed doors. TXU, Caesars, Clear Channel and Freescale did “distressed exchanges”, in which creditors accept losses in return for new debt. Buy-out firms also protected themselves by aggressively buying back bank debt at distressed prices when they could. Creditors will be the ones to suffer most from private equity’s exuberance.

Caveat investor

Amazingly, most private-equity firms’ returns will be fine if the IPO market stabilises enough to list their companies. Even KKR, which invested in nine of the 20 largest buy-outs and will have to write off its $2 billion investment in TXU, may see its 2006 fund make money. TPG, which invested in seven of the 20, is one of the worst performers, with exposure to TXU, Caesars and Freescale (the latter two have lost 60% of their value). At the least TPG will probably return money to investors when the fund winds up. But that takes ten years, a long wait for a small return.

How will private-equity firms have managed to turn a profit, when they overleveraged and overpaid? Typically they do not invest more than 10% of a fund in any one deal, so diversification helped. So did perverse “deal” fees. Buy-out firms charge the firm they are acquiring around 1-2% of the deal for the privilege of being purchased. TXU paid its sponsors $300m at acquisition and at least $35m a year to be managed and advised.

Whereas private-equity firms may be toasting catastrophe averted, investors have less to celebrate. Most mega-deals were done by “clubs” of firms, so investors have multiple exposures to some of the worst deals. How the companies themselves will fare is a separate consideration. Their debts may leave a lasting scar.

Private equity’s reputation should be bruised a bit too. The techniques many firms used to keep their companies alive amount to little more than financial engineering, says Peter Morris, the author of “Private Equity, Public Loss?”. The industry’s boasts of value creation may look hollow, at least for many of the mega-deals.

Source: http://www.economist.com/node/21559957