The Bank for Investment and Development of Vietnam (BIDV) appeared to be the most impacted by the restructuring plan for the debt-ridden Hoang Anh Gia Lai (HAGL), credit ratings agency Moody’s has said.

In a report released on May 26 on HAGL’s financial status, Moody’s Investors Service said that among current creditors BIDV has the largest exposure to HAGL.

As at the end of last year, HAGL confirmed its total debt amounted to VND27.099 trillion ($1.21 billion), an increase of 50 per cent compared to the VND18,126 billion ($824 million) announced in 2014.

The group’s shares have also fallen significantly, by 60.5 per cent and are now at their lowest level since it went public in 2008.

The problems of the debt-laden HAGL, its creditors acknowledge, stem from its failure to reap results from its venture into agriculture.

Its business performance has been severely affected by ever-falling prices of agriculture commodities around the world.

The good news is that HAGL will have part of its massive debt restructured, under a plan proposed by creditors and backed by the State Bank of Vietnam (SBV).

The debt restructuring, which has the potential to be the largest in Vietnam since Vinalines in 2013, is credit-negative for Vietnamese banks exposed to HAGL because it will reduce and extend the cash flows of HAGL’s debt obligations and lower loss-absorption buffers, according to Moody’s.

Based on HAGL’s first quarter 2016 financial report, Moody’s listed its creditors as including BIDV, VP Bank, SHB, Sacombank and the military-run MBBank.

“BIDV has the largest exposure to HAGL among Vietnam’s banks, with loans and bonds comprising a high 27 per cent of the bank’s tangible common equity (TCE) at the end of March 2016,” Moody’s said.

“Meanwhile, VPB’s exposure was 12 per cent of TCE at the end of December 2015 and SHB’s was 6 per cent at the end of March 2016.”

Source: Moody’s

Mr. Eugene Tarzimanov, Vice President and Senior Credit Officer at the Singapore-based Moody’s Investors Service, said that “the exposure numbers for specific banks came from the published financial reports of HAGL, the audited report for 2015 and the unaudited report for the first quarter of 2016” when asked by VET about data credibility.

Analysts at Moody’s don’t believe the banks will have to create additional loan loss provisions.

The negative impact on the profitability of the banks will come from possibly lower interest rates on HAGL loans and bonds, so they will earn less on these assets or maybe even earn nothing if interest rates are reduced significantly.

“The HAGL restructuring could be credit-negative for BIDV, which has the largest exposure to HAGL,” Mr. Tarzimanov told VET.

The SBV reportedly submitted a plan on May 16 to the Prime Minister’s office on restructuring HAGL’s debts. None of HAGL’s creditors were available for comment when contacted by VET.

HAGL is a large privately-owned agriculture and real estate company with debt obligations that totaled $1.25 billion as at the end of March 2016, or equivalent to 0.6 per cent of Vietnam’s GDP in 2015.

On April 11 it announced it was working with its creditors to restructure its debt obligations.

The announcement followed the publication of HAGL’s financial report for 2015, which revealed the company’s non-compliance with some debt covenants and prompted its independent auditor, Ernst & Young, to express doubts about HAGL’s ability to continue as a going concern.

Source: Moody’s

According to sources at the SBV, the restructuring plan for HAGL includes a decrease in interest rates, extension of debt maturities and regulatory forbearance allowing banks not to downgrade their HAGL exposures or move the exposures into higher-risk categories.

The latter, if implemented, would allow the banks to avoid having to create additional loan-loss provisions.

The restructuring plan for HAGL, according to Moody’s, highlights the authorities’ willingness to continue the practice of regulatory forbearance for banks based on loan classifications that do not reflect economic reality.

Because of likely regulatory forbearance, additional credit costs associated with HAGL exposure would be minimal.

“However, lower interest rates on HAGL’s borrowings will further hurt banks’ low profitability,” the Moody’s report stated.

Lower commodity prices and the ongoing drought in Vietnam have weakened the debt repayment ability of firms such as HAGL.

This may lead to further deterioration in asset quality metrics for banks with large exposures to agriculture and commodities.

In an attempt to rescue HAGL, Vietnam Customs is consulting with the Ministry of Industry and Trade to reduce import taxes on its sugar produced in Laos and imported by the Hoang Anh Gia Lai Import-Export Trading Company.

HAGL recently decided to end a project raising bulls and producing glass using high technology with investment of VND1.6 trillion ($71.48 million) in the central highlands province of Kon Tum.

The provincial people’s committee has given in-principal approval to the termination of the project’s license.

VN Economic Times