S&P Global Ratings has revised its outlook on Vietnam’s largest private conglomerate Vingroup to negative from stable and affirmed its B+ long-term issuer credit rating.
“We revised the outlook because we expect Vingroup’s leverage to stay elevated over the next 12 to 18 months. This is due to the company’s fast debt-funded expansion into new ventures, especially automobiles, which require large upfront spending but will likely have losses in the initial ramp-up phase,” read the ratings report released on September 12.
According to the ratings agency’s projections, Vingroup’s total adjusted debt (including hybrid instrument and operating lease adjustments) could surpass VND130 trillion ($5.65 billion) by end-2019 and reach VND150 trillion-VND155 trillion ($6.52-6.73 billion) by 2020. Its leverage (ratio of debt to earnings before interest, tax, depreciation and amortisation (EBITDA)) could therefore stay elevated at 4.5x-5.0x over the next two years, compared with 5.0x in 2018 and 3.2x in 2017.
The higher debt will support capital expenditure (capex), which is driven by two major spending pushes: growth of existing businesses and ramp-up of new ventures.
“We forecast Vingroup’s annual capex will be VND20 trillion-VND25 trillion ($869.5 million- $1.08 billion) higher than our previous expectation over the next two years. Investments in the auto business will account for 40-45 per cent of the growth in capex.”
“We estimate Vingroup needs to realise at least 45 per cent revenue growth in its existing businesses in 2020 to offset the increasing leverage,” noted S&P.
In a previous press interview, Nguyen Viet Quang, CEO of Vingroup, said that the investment capital for VinFast project is partly from its own capital and mobilised from its member companies, while most of the rest have come from external borrowings.
S&P said that Vingroup has wide access to equity markets and can attract high quality, long-term strategic institutional investors. The strength of being the largest enterprise in Vietnam by market capitalisation could alleviate some pressure on Vingroup’s leverage and help the company to optimise its capital structure. The strategic cooperation with investors could also support growth and expansion.
“We affirmed the rating because we believe Vingroup will maintain its position as the largest property developer and shopping mall operator in Vietnam. The company has 15-20 per cent market share in the property development sector and 60 per cent market shares in shopping mall leasing in the cities of Hanoi and Ho Chi Minh.”
The negative outlook, meanwhile, reflects a one-third chance that we may downgrade Vingroup if the company's leverage and execution risk increase related to its business expansion over the next 12 months. These factors could potentially cause the company's ratio of debt to EBITDA to stay above 5.0x for a prolonged period.
In 2017, S&P upgraded Vingroup’s long-term issuer credit rating to B+, thanks to its better market position than its peers in Southeast Asia.
Last October, Fitch Ratings also affirmed Vingroup’s long-term foreign- and local-currency Issuer Default Ratings at B+. The outlook was revised to negative from stable, reflecting the company’s heightened business risk.
The credit rating agency nevertheless announced that it withdrew its ratings in July as Vingroup has opted to stop participating in the rating process.
