Standard & Poor's on Monday cut its long-term credit rating on Vietnam's state mining group Vinacomin after signs the government might not help a similar state-owned company, troubled shipbuilder Vinashin, with debt payments.
What happens to Vinashin will set the tone for Vietnamese borrowing in the near future. Should Vinashin fail to make its debt payments, not only would the cost of capital rise for other state-owned companies, but questions may be asked about the government's ability to service its debt, analysts say.
"We downgraded Vinacomin to reflect our view of the 'low' likelihood of extraordinary government support to the company... in the event of financial distress," S&P said in a statement.
Vinacomin on Nov. 23 postponed an effort to sell up to US$500 million in 10-year dollar bonds on which it had been looking to pay 7.25 percent, citing adverse market conditions.
Previously, S&P had rated the chances of such intervention as 'extremely high'. However, recent developments in the case of the heavily indebted Vietnam Shipbuilding Industry Group, or Vinashin, have led to a change in that view.
With top-level government support, Vinashin expanded into non-core businesses and racked up debts worth about $4.4 billion before nearing bankruptcy this summer, prompting the authorities to step in to restructure the over-extended conglomerate.
Analysts and creditors are watching to gauge the extent of Hanoi's backing for Vinashin ahead of Dec. 20, when a $60 million payment is due to a group of international creditors on an eight-year, $600 million loan.
Vinashin has asked for a postponement and the creditors, led by Elliott Advisors and Standard Chartered Bank, will meet on Tuesday to discuss the delay.
S&P analyst Wee Khim Loy said uncertainty has grown and "our expectation is that Vinashin might default on its debt".
The new overall rating of 'BB-' on Vietnam National Coal and Minerals Industries Holding Corp Ltd reflects its stand-alone credit profile. Its previous rating was 'BB'.
More expensive credit
The Vietnamese government handed Vinashin the proceeds from its first foray into the international debt market, a $750 million bond sale in 2005.
"You would think that the government would support a company that it provides financial transfers to," said Tom Byrne, senior vice president and Asia regional credit officer at Moody's Investor Services.
"But this doesn't appear to be the case, so it raises the question: To what extent will the government support other state-owned enterprises that have borrowed or intend to borrow?"
"If Vinashin were to be allowed to default on foreign currency obligations you'd start to think whether the country itself has adequate amounts of foreign exchange reserves to meet other obligations," he added. Moody's is reviewing Vinacomin for a possible downgrade.
Fitch, another ratings agency, downgraded Vietnam's sovereign credit rating in July to four notches below investment grade, citing a stop-and-go macroeconomic policy and other problems.
Fitch sovereign ratings analyst Vincent Ho said he had not ruled out the possibility of government support.
"We are aware of Vinashin's request of its creditors to postpone the payment ... which means that the situation is not looking very good," he said.
"That could drag the creditworthiness of the Vietnamese government if the situation gets worse."
Jonathan Pincus, dean of the Fulbright Economics Teaching Program in Ho Chi Minh City, called the Vinacomin downgrade a "good news bad news story".
"Communicating to the companies and to creditors that there is no implicit government guarantee will force creditors to consider loans to Vietnamese corporates very carefully," he said.
"The bad news is that this will make it more expensive for everyone in Vietnam to borrow overseas."