Vietnam default swaps soar as lenders await Vinashin repayment

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The cost to insure Vietnam's debt against default soared to its highest level in 17 months as international lenders wait for the state-run shipping company to make a US$60 million loan repayment due today.

Credit-default swaps on Vietnam government debt were quoted at 295 basis points as of 1:18 p.m. in Singapore, according to Royal Bank of Scotland Group Plc. That's the highest since July 17, 2009, prices from data provider CMA show.

Moody's Investors Service cut the Southeast Asian nation's credit rating to B1 from Ba3 on Dec. 15 citing the risk of a balance of payments crisis, and highlighted "debt distress" at Vietnam Shipbuilding Industry Group, known as Vinashin.

The company, which the government says had debt of about VND86 trillion ($4.4 billion) as of June, won't be able to make the loan repayment because of a lack of funds, Chairman Nguyen Ngoc Su told the Vietnam Economic Forum website last week.

If Vinashin doesn't pay, it will "make it more expensive for any Vietnamese entity, government-owned or otherwise, to get overseas financing," Jonathan Pincus, an economist at the Harvard Kennedy School in Ho Chi Minh City, said in a phone interview. "People in the government don't seem to be thinking long-term about the implications of this for Vietnam's financial credibility."

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt. The contracts closed at 287 basis points on Dec. 17, capping their biggest weekly rise since Aug. 27, CMA prices show.

Dollar bonds

Vietnam's dollar bonds are down 5.7 percent this month, HSBC Holdings Plc indexes show. The debt lost 2.4 percent in November, the worst monthly performance since a 4.9 percent drop in November 2009, the indexes show.

The nation's $1 billion of 6.75 percent bonds due January 2020 were unchanged at 102.5 cents on the dollar to yield 6.382 percent today, the lowest price since June 28, according to BNP Paribas SA prices on Bloomberg.

The International Monetary Fund this month said Vietnam needs a "coherent package" of measures including higher interest rates to re-establish monetary policy credibility and slow inflation.

Vinashin's near collapse indicates a "systemic failure" in regulators' supervision of state-owned companies, according to the Asian Development Bank.

Vinashin loan

Vinashin hired Credit Suisse Group AG to help it organize a $600 million, seven-year loan in December 2008. A lender steering committee, comprising representatives from the Swiss bank, Standard Chartered Plc and hedge fund Elliott Advisors Ltd., has been established to negotiate with the company.

KPMG LLP was appointed to provide advice and support to Vinashin while law firm Allen & Overy LLP was hired by the lender group as legal advisers.

Edward Middleton, the Hong Kong-based KPMG partner in charge of restructuring services, declined to comment in an e- mailed response to questions. David Kidd, a partner at Allen & Overy, also declined to comment.

Vinashin representatives weren't immediately available by phone today. Credit Suisse Hong Kong-based spokesman Adam Harper and a public relations firm representing Elliott Advisors both declined to comment.

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