VEC on a collision course

The ministry (MoF) just enacted Document 12761/BTC-QLN requiring Vietnam Expressway Corporation (VEC) to self arrange capital sources for payment of mature bond yields to Japan-based Dai-i-chi life insurance company.

The move poured cold water on VEC’s expectation of receiving further support from MoF and might push VEC into legal proceedings with its creditors.

“This means the MoF rejects to again act as bond underwriter for VEC’s further bond issuance,” said VEC deputy general director Luong Quoc Viet.

At this time, VEC’s single financial source is toll collection which amounts to around VND700 million ($33,000) per day from the Cau Gie-Ninh Binh expressway. However, this sum is reportedly prioritised to pay completed work volumes for contractors, so the possibility of using the sum for paying mature bond principle and yields owed to Dai-i-chi and some other creditors is fragile.

By mid-October 2012, VEC owed a total VND516.1 billion ($24.5 million) to creditors, including VND100 billion ($4.7 million) principle and VND416 billion ($20 million) mature bond yields of a lending package worth VND4.4 trillion ($210 million) with MoF acting as underwriter to raise investment capital for carrying out Cau Gie-Ninh Binh and Noi Bai-Lao Cai highway projects.

Since VEC project bonds are liable for circulation in five years maximally where as it needs up to 30 years for VEC to recoup capital from these highway projects, VEC was green-lighted by the government to issue bonds for repayment.

However, in early September 2012 the MoF abruptly stopped its guaranteeing role though earlier it had accepted for VEC to issue VND1.819 trillion ($86.6 million) project bonds to further construction and repay creditors.

“VEC currently comes below par in respect to the conditions to issue corporate bonds with the government acting as underwriter pursuant to existing regulations,” said head of MoF’s External Finance and Debt Management Department Nguyen Thanh Do.

Accordingly, VEC could not satisfy two basic conditions - reporting profitable business in the most recent year and getting approved audited financial statement.

Requiring VEC to post profits right during initial investment state is almost impossible as Viet was quoted as saying “Calculations show that VEC would incur losses until 2021 on the back of huge financial costs as it has to pay loan principle and interests of its projects and big amortisation costs whereas income-raising sources remain limited.”

Industry insiders assumed MoF’s recent move to reject underwriting for VEC bond issuances would distort the government’s bond market which is still at its dawn. Besides, rigid regulations relevant to conditions for issuing corporate bonds are pushing VEC into a corner.

“VEC and relevant state agencies are proposing the government to soon enact a specific regime on bond issuance for repayment purposes.  However, when such a regime is still absent, MoF should consider further handling its underwriter role to help VEC ensure creditor interests,” Viet said.