Are Vietcombank bonds attractive?
The Government has permitted the Bank for Foreign Trade of Vietnam (Vietcombank) to issue bonds to raise capital before equitisation.
Concern over capital safety factor
Issuance of convertible bonds will help Vietcombank raise its financial capability. The bank’s overdue debt now accounts for 3% of its total, based on Vietnam’s debt assessment method, however, if international methods are used, it is much bigger.
Although international auditing firms have audited Vietcombank for the past three years, they have not reached an agreement on how to define and assess some norms. Consequently, Vietcombank does not yet have a financial report certified by international auditing firms.
Regarding the capital safety factor, by the end of 2004, it was 5.61% for Vietcombank, the highest of all state-owned commercial banks in Vietnam. However, this rate is still lower than the minimum capital safety factor set by the State Bank of Vietnam (SBV).
With an annual growth rate of total current assets of 15%, if equity capital does not increase or increases at a variable rate, the bank’s capital safety factor will gradually reduce to a worrying level. This year Vietcombank’s capital safety factor is forecast to drop below 5%, and to 4.2 to 4.3% by 2006.
Issuance of convertible bonds before equitisation is believed to help the bank improve its capital safety factor, however, there is still the question regarding the volume of bonds to be issued.
Vu Viet Ngoan, Vietcombank’s General Director, said that in the initial draft scheme, the volume of bonds is worth around VND1, 2000-1,5000bil. Some economists say that VND1, 500bil does not match the bank’s requirement for equity capital, which they say must range between VND3, 000-VND5, 000bil.
Is convertible condition attractive?
Vietcombank’s bonds are registered bonds, with par value of VND1mil and a seven-year term with a fixed interest rate equivalent to the rate at time of issue.
The interest rate is permitted to fluctuate from 8-10% per year; however, the buyer may not pay attention to the interest rate or time of issuance. This is why Vietcombank will sell its shares in 2006 and will convert bonds into shares. Bond owners do not have the right to vote or get involved in the bank’s management, however, the bank will provide them with periodical information, probably 2-3 times.
The capital raised from bond issuance will be added to Vietcombank’s equity capital and the payment sources for bonds will be calculated into the bank’s operation costs. When Vietcombank is equitised, bond owners can re-sell bonds for the bank and have the right to buy shares at the average winning auction price of normal shares in the first phase of issuance. Such conditions are less attractive. Change of ownership of bonds into the right to purchase shares is an indispensable condition but at what price will the owner of bonds be able to buy?
If they can buy shares at the average auction price, bond owners will not benefit from convertible bonds. If they directly participate in Vietcombank share auction they can buy shares at lower prices than the average winning auction price, but in this case, ownership of convertible bonds is nonsense. They may raise the question, whether they should buy Vietcombank’s convertible bonds or wait till the bank auctions its shares and become directly involved in the auction.
If Vietcombank gives priority to its strategic partners, including foreign banks and financial institutions this would be valuable, however, this is contrary to the principle of an auction, which is open to all investors.
The pilot equitisation of Vietcombank is significant for other state-owned commercial banks, especially to banks that have asked for government permission to equitise, such as the Bank for Investment and Development of Vietnam (BIDV).
SBV always emphasized that equitisation must be implemented carefully to ensure social-economic stability and the safety of the system of credit institutions. However equitisation must attract investors, and if the above conditions are applied for Vietcombank’s convertible bonds, investors will probably hesitate.
(Source: TBKTSG)
Source: TBKTSG - VietnamNet
http://english.vietnamnet.vn/reports/2005/10/501591/