Tycoon falls victim to country's debt bubble in wake of property, commodities slump

By James Hookway and Vu Trong Khanh

HANOI -- A decade ago, Doan Nguyen Duc was the poster child for the new, capitalist Vietnam. Today his holding company is scrambling to rearrange some $1.2 billion in debt after being hit by a property slump and a collapse in commodity prices.

A stocky man with a thick mustache, Mr. Duc was the first Vietnamese tycoon to buy a private plane. He nurtured rubber plantations across the border inLaos and Cambodia and bought stud farms. His furniture factories filled the condominiums his property business was building. One morning while slurping noodles in Ho Chi Minh City in 2009, he told a visiting reporter he was eyeing a 20% stake in famous English soccer club Arsenal FC.

That purchase never happened, and now Mr. Duc is tearing up many of his other plans as he spins off businesses to salvage his firm, Hoang Anh Gia Lai.

Economists say HAGL's problems are like those of many other companies struggling with the consequences of Vietnam's debt boom in recent years. How Mr. Duc and his lenders handle the crunch could be an indicator of how quickly Vietnam might become the next breakout global growth story.

Policy makers and government advisers say restructuring of the debt will be a difficult process, due in part to the range of HAGL's interests.

Mr. Duc got his start building furniture in the 1990s and has repeatedly denied allegations from environmental groups that he skirted regulations to build his timber empire before moving into rubber and his other businesses. The allegations are related to the way he acquired land and the way he allegedly harvested timber and developed palm oil plantations; he has never faced litigation over these issues.

Today, the company is one of Vietnam's largest, with total assets of $2.27 billion at the end of June. Its revenue reached $163 million in the first half of the year, up a fifth from the same period in 2015.

"Everybody wanted to lend to HAGL. Its businesses were good and Mr. Duc had good relationships with the banks and government officials. He seemed like a star," said Cao Si Kiem, a former governor of Vietnam's central bank who now advises the government on economic policy. "But the company moved too quickly into too many businesses it didn't know anything about."

The company's stock price isdown some 60% so far this year, and Mr. Duc has sold off businesses ranging from a cattle farm to a soccer academy that groomed players for his own professional team.

People familiar with the matter say he is trying to line up other sales, including a shopping and hotel complex in Myanmar.

In September, Mr. Duc told a meeting of the company's shareholders that he intends to sell 80,000 hectares, or more than 300 square miles, of rubber plantations in Laos to a Chinese investor for $355 million. That proposal has in some quarters has been interpreted as a slap at Vietnam's government, which is competing with Beijing for influence in Laos.

Mr. Duc declined to be interviewed for this article.

Vietnam generally prefers to project an image of being a high-tech production site for the likes of Samsung Electronics Co. and a stylish tourism hub for visitors from around the world.

The government also is inviting companies toregister an interest in buying its majority stakes in Vietnam's two largest breweries, which it hopes will raise more than $2 billion. Potential bidders include Anheuser-Busch InBev NV and Heineken NV as well as Japanese and Thai brewers.

But the horse-trading and score-settling accompanying HAGL's financial healing are threatening to sully this image of Vietnam by drawing attention to the country's debt problems.

It is a persistent issue across the country's economy, which last year grew 6.7% to $194 billion. Many of the nation's problems are focused on large conglomerates, including state-owned enterprises. In one of the best-known debt cases, state-owned shipbuilder Vinashin racked up debts of over $4 billion and its chairman was fired and convicted of economic mismanagement in 2012, after which the government stepped in to restructure its business.

Since then, a flurry of corporate borrowing has led to rising delinquency rates, which in turn have forced banks to jack up lending rates -- still at around 11% -- throttling growth at many private businesses. Meanwhile, nonperforming ratios continue to rise.

Moody's Investors Service warns that if the government replicates its rescue of Vinashin in the case of HAGL, then a too-big-to-fail mind-set might encourage banks to lend more than they should and companies to borrow more than they can afford.

"To be fair, Vietnam has a long history where the central bank relaxes rules for banks. This allows the banks to digest problems over a long period, instead of recognizing the problem in line with best practices," said Eugene Tarzimanov, a credit analyst with Moody's in Singapore, in September. "But there is an element of moral hazard for the banks, because if you are underwriting loans you shouldn't consider a government bailout of or support for your borrower."

Some of the company's creditors say it is precisely this kind of government backing that is needed to put the company back on its feet -- and to present a model for how to mop up the debts plaguing Vietnam's economy.

"It's going to be difficult to unravel all of the problems and get everybody to agree on a course of action," said Can Van Luc, special adviser to HAGL's biggest creditor, the Bank for Investment and Development of Vietnam, to which HAGL owes $324 million.

"But if we can do it, it could create a new framework for resolving all the debt problems which remain in the private sector," Mr. Luc said.

Write to James Hookway at james.hookway@wsj.com and Vu Trong Khanh at Trong-Khanh.Vu@dowjones.com

(END) Dow Jones Newswires

November 10, 2016 02:48 ET (07:48 GMT)

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