Vietnam up to its old tricks?
Is Vietnam up to its old tricks, playing cat and mouse with western banks as it once did with American troops? Or is it a recently liberalized Communist country, out of its depth in the capitalist world of markets and bankers? That is the question puzzling bankers and debt holders as they struggle to understand why the country has still not settled its lengthy negotiations with the London Club to reschedule $750 million worth of unserviced private-sector loans and interest.
At issue is the extent of forgiveness. The State Bank, which last year negotiated a rescheduling of the country’s debt with the Paris Club, covering foreign government creditors, received 50% forgiveness – a generous settlement recognizing Vietnam’s progress towards opening up its economy and keeping inflation under control. The creditor banks have no intention of being so lenient, and they are offering the Vietnamese Bank of Foreign Trade a maximum of 35%.
The Vietnamese are restrained from accepting the offer by suspicion and ignorance, says Peter Scott, the chairman of Beta Funds, a fund manager which invests in Vietnamese debt. “The government in Vietnam does not understand the difference between government and commercial debt. If the Bank of Foreign Trade does not get 50% forgiveness, it will be regarded as having failed. They will think the foreigners are trying to cheat them.” Scott believes the negotiations will drag on past the Communist Party congress in June and others believe until the end of the year.
Hanging on the conclusion of the negotiations is Vietnam’s return to the international capital markets. The country has been talking for almost two years about a Eurobond issue valued at between $100 million and $200 million. But this is unlikely to be issued until the current negotiations are settled. Early last year, Nomura, which is advising the government, said the bond would be issued by the end of the year. At the end of the year, they said it would be issued in the first quarter of this year. Now Nomura expects nothing before the end of the year. Two groups are watching the negotiations with special interest: the current holders of the debt want to know its value (the greater the forgiveness, the lower the debt’s value); and farsighted members of the country’s government who are getting itchy feet.
The latter group includes the secretary general of the Vietnamese Communist Party who has led the pack baying for a quick settlement. Earlier this year, he said that Vietnam risked becoming a debtor nation and a “wage-earner for capitalists” unless it repaid the debt owed to international creditors. The western bankers ironically agree with the party official, as some are getting heartily fed up with the negotiations. According to Peter Bartlett of Banque Indosuez, “if the negotiations drag on, then creditors could become more intransigent and demand less forgiveness, or no forgiveness at all as the economic outlook for the country improves”.
A further puzzling element in the delay is the comparatively small amount of the debt, an amount well within Vietnam’s capacity to settle. Says Jerome Booth, head of research at ANZ Bank: “Creditors are not in a mood to forgive. This is a country which has enormous growth and is much in fashion. The creditors feel they are in a strong bargaining position.”
Creditors’ impatience briefly surfaced late last year, when a British Virgin Islands-registered company – Abbotsford Investments – got so fed up with the delay in settling its debt that it threatened to sue Vietcombank, Vietnam’s largest state-owned bank, for repayment in full. Deutsche Morgan Grenfell came to the government’s rescue by buying out the debt at a favourable price. The move raised the spectre of other non-London Club creditors challenging the government in the courts.
The timing of a settlement is only one factor for the debt holders who, despite everything, believe they are sitting on a good investment. Other factors are the amount of forgiveness likely to be granted and the amount of past due interest (PDI) likely to be repaid by the Vietnamese and over what period. ANZ and Banque Indosuez argue that Vietnamese bonds, which currently stand at 80% of face value, will trade up to 110% of value and further, once the deal with the London Club is obtained. They reach this number by working backwards from the highest value that could be placed on the bond.
Vietnam owes more than 100% of the face value in interest, so if it were to repay the entire debt and all the interest, the bond would theoretically be worth 210%. If, as seems more likely, it only repays 65% of the face value, and only the first-generation interest (ie not the interest on interest or the default fee), the number comes down to 130%. The debt will be repaid through the issue of new 10- or 15-year bonds, and the banks estimate the cost of carrying these bonds at a further 20%.
ANZ Bank believes the bonds will trade at 500 basis points over treasuries. But these calculations cannot take account of the one unpredictable element in the current London Club negotiations – the length of the cat-and-mouse game now in progress. If this goes on to the end of the year, the cost of holding the bond starts to eat away significantly at the capital upside expected following a deal. One bank argued that 10% could be lost were the negotiations to go into the new year.
Banks argue that the Vietnamese would serve themselves – and the banks – better if they agreed to pay the full face-value of the outstanding debt. That would improve their image in the markets and obtain a higher rating when they come with their sovereign bond. One suggestion is that the full face value could be met relatively painlessly by issuing a bullet bond at par, with low interest payments and a maturity of 20 or 30 years.
This approach would make sense if Vietnam did not have to settle its Russian debt as well. Vietnam has some 10 times more debt outstanding to Russia than it has to the west, and a good deal in London might give the Russians some ideas. With so many political and economic issues at stake, perhaps it is no wonder the Vietnamese are taking their time. Nick Kochan
LATIN AMERICA
Big push by foreign banks
Only 15 months after the
Mexican devaluation crisis, foreign investment banks are in the midst of an aggressive expansion of their operations within the Latin American region. Since late last year there has been a flurry of new office openings, as part of an effort to win equity and debt underwriting mandates, as well as advisory mandates for privatizations and private sector M&A deals.
One of the most favoured countries is Peru, which is enjoying robust economic growth and is in the midst of a major privatization programme. Last December Merrill Lynch opened an office in Lima. It was followed in January by Robert Fleming, the UK-based international investment bank. And in a visit to Lima in early January, ING Group chairman Aad Jacobs announced that ING Barings, which already has a research presence in Peru with six analysts, would soon be opening a brokerage with a seat on the local stock exchange.
The timing of Jacobs’ announcement coincided with the pitch by ING, in alliance with Morgan Stanley, for the lead position on the upcoming international equity offering from Telefónica del Perú. It illustrates the importance placed by some houses on establishing a local presence in order to help win mandates – rather than simply flying in teams from New York for the big presentations. In the event, the Telefónica mandate was awarded to Merrill Lynch, in alliance with JP Morgan.
The recently formed Fleming Latin Pacific is a 50:50 partnership between Robert Fleming and two former senior officials in the Peruvian government. Carlos Montoya is a former chief executive of the state privatization agency Comisión de Promoción de la Inversión (Copri) which, since the beginning of the 1990s, has overseen one of the world’s most extensive privatization programmes, raising $8 billion from the sale of holdings in sectors such as mining, telecommunications and energy. Emilio Zuniga is a former chairman of Petroperú, the state-owned
oil company.
The joint venture will initially employ 10 executives and focus on capital markets, international M&A and research. In addition to Peru, the office will cover the other member countries of the Andean Pact – Colombia, Venezuela, Bolivia and Ecuador. The name Fleming Latin Pacific reflects an unusual aspect of Fleming’s strategy: it will stress equity investment from Asia in addition to the more traditional sources of Europe and North America. “Asian investors should look east as well as west,” comments Raymond Kelly, the New York-based sales director for North America, who points to the strengths of Jardine Fleming as one of the most powerful equity houses in Asia.
Goldman Sachs is strengthening its presence in Brazil. Last November, it opened up a representative office in Sao Paulo, with the emphasis on cross-border equity and debt financing, M&A, structured finance and project finance, and it is also opening an office in Mexico, where the firm will have a trading presence as well as local underwriting capabilities.
“Each of these offices will allow us to be participants in the local environment, to interact with our clients on a more frequent basis and to have a level of dialogue that you wouldn’t have in terms of frequency or breadth and depth if you were visiting from New York,” explains Jaime Yordan, a Goldman partner based in the new São Paulo office.
Salomon Brothers is also in the midst of adding to its Latin American network and, last October, made a 49% investment in the corporate finance, fixed-income and equity businesses of Merchant Bankers Asociados (MBA) in Buenos Aires. The investment was made via a
capital increase in two MBA sub-sidiaries: MBA Banco de Inversiones, a wholesale bank engaged in fixed-income trading, and MBA Sociedad de Bolsa, an Argentine broker-dealer in equities. The move by Salomon formalized an existing corporate finance relationship with MBA, and expands this relationship into cooperation in the domestic capital markets.
This year is expected to see more alliances between Latin American institutions and foreign banks – a clear signal that not only is there lucrative advisory business to be won, but that the big foreign houses believe the flow of international debt and equity offerings is about to surge forward once more, as institutional investors put the Mexico shock behind them and return to buying Latin debt and equities.
Michael Marray
CHINA
Varying fortunes of China chips
Unfazed by the fact that the recent bull run in Asian emerging markets has largely bypassed China, the region’s wilier deal-makers are eagerly pushing China “concept” stocks in both the primary and secondary markets. Investors weary of years of poor returns from a long list of Chinese products and offerings, will not be surprised to hear that the new issues contain a mixture of the good and the bad.
While bourses in Hong Kong, Jakarta and Manila posted gains of over 25% in the three months to February, Chinese markets, in contrast, failed to recover from a disastrous 1995. Share prices in Shenzhen fell by 31.3% last year – the worst performance in Asia – while Shanghai B shares (reserved for foreign investors) dropped 24.1%. Shanghai has continued its descent into the new year with the composite index down by 21% in the past three months.
Few apart from the most committed of B-share vendors expect a revival. A two-week closure of the domestic markets from mid-February for Lunar New Year celebrations is only one of many reasons cited for bearishness. “I am still very cynical about the Chinese stock markets,” says Clive Weedon, head of institutional sales at HG Asia in Hong Kong. “The full impact of the central government’s two-year austerity programme is yet to be felt at most listed companies and there is little good news in the offing.”
Graham Ormerod, head of China research at Jardine Fleming Securities, agrees: “With the reporting season due to begin in April, we will be hearing from many Chinese companies for the first time in over a year. There is a strong possibility of some nasty surprises which could compound institutional investors’ already jaded view of transparency in China. Coupled with very poor liquidity [turnover in Shanghai’s 36 B shares averaged less than $3 million a day in the first two weeks of February], it is difficult to see foreign investors returning to either Shanghai or Shenzhen.
Similar concerns have dogged China’s H share companies listed on the Stock Exchange of Hong Kong (SEHK) with the Hang Seng China Enterprises Index under-performing the local Hang Seng Index by 35.8% over the past 12 months. “I see very little to be excited about for the H share companies,” says Andrew Freris, chief regional economist at Salomon Brothers Hong Kong. “They are operating under a painfully tight monetary policy and I fear earnings will be at best flat for over two years down the line.”
Investors are still recovering from last autumn’s H share results shocks. Anhui province’s Maanshan Iron & Steel, for instance, weighed in with after-tax profits of just Rmb40 million ($4.8 million) for the six months ended June 30. That was a stunning 93% down on the year earlier. Almost as precipitous was the 72.7% fall in China’s biggest domestic cargo handler Shanghai Haixing Shipping’s first-half earnings: a decline that sparked a one-day sell-off of its shares producing a 27% fall in the stock price.
But analysts are quick to contrast the fortunes and credentials of the B and H share companies with those of the “red chip” Chinese corporations – usually subsidiaries of mainland enterprises – that have been listed on the SEHK for several years. Star performers among these in recent months have included CITIC Pacific, Guangdong Investments and China Resources, all of whose shares have soared along with, and sometimes ahead of, the Hang Seng Index. “I am very bullish on red chips in both the short and long term,” says
Freris. “They offer investors liquidity and transparency while management at most is on a different planet to the H share companies.”
The strong record of such counters has not been lost on investment bankers keen to exploit any morsel of positive Chinese news. Crédit Lyonnais Securities Asia (CLSA) proved to be ahead of the game when it packaged Hong Kong property company New World Development’s Chinese projects into a $267 million initial public offering (IPO) for New World Infrastructure (NWI) last year. The offering was oversubscribed by 19 times and NWI’s share price rose by 42% in the first six weeks of 1996 to a high of HK$20.1. “NWI is part of a new trend for the larger Hong Kong developers to become quasi-red chip players,” says Weedon.
An equally rapturous reception was given to the SEHK share issue of HK$1.37 billion ($177 million) raised by Tingyi Holdings in January. The Taiwan-based noodle manufacturer was marketed as a China concept stock because of its high profile in the Chinese convenience food market. And though priced over its initial indicated range at HK$1.68 per share, by lead manager Deutsche Morgan Grenfell, and launched amid growing political and military tension between China and Taiwan, the deal was oversubscribed by 15 times.
Tingyi’s stock traded up to HK$2.1 within one month of the issue. Similarly structured issues are now being touted for Taiwanese red chips, President Enterprise, Wei Chuan Food and Tung Ho Steel.
Perhaps the most controversial new issue is the HK$5 billion spin-off listing by Henderson Land Development of Henderson China, comprising the company’s mainland property interests, scheduled for March on the SEHK. A HK$1.5 billion IPO is expected for Henderson China, according to sponsor CLSA, together with the HK$3.5 billion in convertible bonds (CBs) issued by its parent in October 1993 which carried a three-year deadline for conversion. Henderson’s offering has raised eyebrows in Hong Kong because of a surprise revaluation of the group’s Chinese property interests as at December 1995. The total land bank of Henderson China stands at 22 projects with a gross floor area of 27.9 million square feet according to CLSA and is valued at HK$13.89 billion. This figure includes $8.09 billion described by the group as “surplus” arising from the December revaluation.
“One building in particular, the Beijing Henderson Centre, is given a capital value of HK$6.89 billion,” says the property analysts at one leading Hong Kong securities company. “And this represents more than a third of the total value of Henderson China and two-thirds of the overall revaluation surplus. But we have been given no reason for the increase in value and such a large upgrade is difficult to substantiate.”
Analysts find the revaluation, coming 10 months before the deadline for conversion of Henderson China’s CBs, particularly perplexing in view of the problems that have afflicted the Chinese real-estate sector since the austerity programme took hold in July 1993.
A dearth of transactions has made the market difficult to assess but, says one analyst,”a glut of new projects and the poor performance of listed Chinese real-estate companies suggest that it is under pressure”. Even red chips, it seems, must be approached with caution.
Tony Shale
BALTICS
Building on a healthy trade
Estonia finally looks set to launch a formal stock market when the Tallinn Stock Exchange starts trading on May 31. Although it will be the last of three Baltic states to establish an exchange, Estonia is not only the most advanced economically, it has also created a solid technical infrastructure for the market. While Lithuania remains bogged down in its banking crisis and Latvia’s economy was dragged down by last year’s collapse of Baltija Bank, Estonia is one of the fastest-growing countries in eastern Europe, with GDP set to expand by 5% this year.
A healthy over-the-counter (OTC) market already exists, with shares traded through the central depository, the EVK (which claims a 100% success rate in settling trades). OTC turnover is currently around ECr15 million ($1.2 million) a week (compared with $2.4 million in Lithuania in 1995 and $35,000 in Latvia). Trading in Estonia is concentrated heavily in a handful of stocks. Hansa Bank – the largest in the Baltics – is the most actively traded (accounting for around half of all turnover during some months), with the Tallinn Department Store, Saku Brewery, Bank of Tallinn and Savings Bank being the other main active market constituents.
These are likely to form the core of the Tallinn Stock Exchange’s trading activity. As in the other Baltic markets, private entrepreneurs are expected to be slow in listing their companies. “The whole idea of being a public enterprise is not a common notion in Estonia,” says Helo Meigas, the Tallinn Stock Exchange project manager. Her view is echoed by Karlis Cerbulis, the president of Latvia’s Riga Stock Exchange, who says: “The truth in eastern Europe is that capital-raising only happens a few years after markets get going through privatization.”
Privatization has done little to breathe life into Estonian securities trading. It began in 1992, but did not get going on a large scale until early 1994.
However, the success of the public sale of shares in the privatized Tallinn Department Store and the Saku Brewery in 1995 is one reason why Meigas now believes the government is more interested than it was a year ago. Privatization of four major state assets – rail, telecom, ports and energy – is expected later this year, with details of the reorganization of the companies involved due in June.
Nevertheless, the government’s own financial position still means that its enthusiasm for the securities market is limited. As the Estonian Privatization Agency’s foreign relations manager, Kulliki Linnamagi, explains, the aim of privatization is “to restart industry, not to fill the state budget”. Hence there is less need to nurture a buoyant securities market as a way of obtaining better prices for privatized shares. Nor does the government need a securities market to help it sell T-bills: Estonia’s balanced budget requirement means that there continues to be practically no market for government bonds.
Trading on the Tallinn Stock Exchange will be daily (unlike the Latvian and Lithuanian exchanges) and rules are being drafted to meet EU standards. Lithuania’s was the first market to get under way in the Baltics and it should be the first to be included in the International Finance Corporation’s (IFC) emerging markets index, later this year. Leading stocks in the banking and industrial sectors – Kalnapilis Brewery, Vilnius Bank and Hermis Bank – have already attracted foreign investor interest.
As in the other Baltic states, a reduction in interest rates to improve the relative attractiveness of equities over bonds would be positive for the market. Three-month interest rates in Lithuania were 38% in February – more than 10% above the rate of inflation. The Riga Stock Exchange needs a different kind of stimulus: more product to trade. Twenty-nine companies were privatized for vouchers in January 1995 and they got the market going in July last year.
The listing of the privatized Unibanka in January 1996 effectively tripled volumes but, apart from the privatized companies, Cerbulis says, “only one other reasonably-sized company has issued shares, the Rigas Komerc Bank”.
More product will be available when Latvian Gas is privatized later this year. Two per cent of its shares are being offered to the public and a further 300 companies will be sold. Cerbulis hopes more of the good companies, privatized in the early days of the sell-off process, will come to the market. He thinks fraud opportunities have dropped and that there’s a recognition of the need for a regulated marketplace in the wake of last year’s banking crisis.
