Power producer secures Vietnam's largest ever ECA-backed loan

A subsidiary of Petrovietnam, the state-owned oil and gas group, has secured the equivalent of $470 million through an Export Credit Agency-supported debt financing for the construction of a combined-cycle power plant project in Vietnam.

The deal for PetroVietnam Nhon Trach 2 Power Joint Stock Co is the largest ECA-backed financing ever to be arranged in Vietnam and shows that these types of financings remain a key tool for the funding of long-dated projects in Asia even as liquidity has otherwise generally returned to the commercial bank markets after the financial crisis. Indeed, for large-scale projects, particularly in the emerging markets, banks are still hesitant to lend on a stand-alone basis for terms longer than three to five years.

"Certain types of projects, i.e. large projects, infrastructure projects and projects with long economic life and payback periods, require long-tenor financings and given the way the markets have been over the past two years they have found it tough to secure that with the banks. That is the space where you will see ECA financings come in and fill the gap," said Sumanta Panigrahi, regional head of export and agency finance for Asia-Pacific at Citi.

"Vietnam has been one of the most active markets in the region over the past two to three years. You won't see a deal every month, but maybe every couple of months," he told FinanceAsia in an interview.

Citi was the sole coordinator and joint lead arranger for the PetroVietnam transaction. The deal is guaranteed by Vietnam's Ministry of Finance and insured by two ECAs from Germany and Japan.

Using the support of government-owned ECAs, which are typically based in OECD countries and have much higher credit ratings than the emerging markets-based borrower itself, banks are able to step up and provide balance sheet for a longer tenor -- in the case of PetroVietnam, as much as 12 years.

"It means there are multiple levels of recourse: first to the underlying project with all the due diligence that that entails, then to the Ministry of Finance, and then also to the ECAs. So it is a very robust structure to allow for the financing of such a large amount, as well as for the long tenor," Panigrahi said.

For the borrower, aside from the all-important access to capital that it provides, the support by a foreign government entity with a higher rating than their own government also means that the loan typically comes at a comparatively lower interest rate.

ECA-based financing ballooned in 2008 with $13.6 billion worth of deals in Asia ex-Japan, up from just $5.3 billion in 2007, according to Dealogic data, which includes deals done on a bilateral basis. Last year was less hectic with $6.6 billion of deals, while this year the demand has picked up again with $5.7 billion worth of financing, or 86% of the total volume in 2009, arranged so far.

Vietnam was the second most active country for these types of transactions last year after South Korea, with five deals worth $630 million. This year the transactions have been more evenly spread among several countries. Vietnam has recorded four deals raising a combined $207 million. Other active countries include Indonesia, India and the Philippines.

In April, Citi helped arranged a $200 million 13-year ECA-backed loan for Vietnam National Coal Minerals Industries Group (Vinacomin), which is to be used to finance the borrower's Lam Dong Bauxite Alumina Project. This loan too was guaranteed by Vietnam's Ministry of Finance.

The PetroVietnam transaction was split into two parts: a $295 million loan insured by Germany's Euler Hermes Kreditversicherungs AG which includes both floating and fixed-rate facilities; and a $175 million financing insured by Japan's Nippon Export and Investment Insurance (Nexi).

Citi's Export and Agency Finance Division, which is part of the bank's global transaction services unit, acted as the lead arranger for the Hermes-supported loan with HSBC and Credit Agricole participating as arrangers. AKA Ausfuhrkredit-Gesellschaft is acting as the Commercial Interest Reference Rate fixed-rate lender, allowing the borrower to access an attractive fixed rate over the life of the loan.

For the Nexi facility, Citi acted as the sole Nexi coordinator, as well as joint lead arranger together with the Development Bank of Japan and The Sumitomo Trust & Banking Co.

As is often the case with these types of club deals, further details of the financing, including the interest cost to the borrower and the split between the participating banks, weren't disclosed. The funds can be drawn in either US dollars or euro at any time during the construction period.

PetroVietnam's combined-cycle power plant will have a total capacity of 750MW and will be fuelled by natural gas supplied by PetroVietnam Gas Corp. All the electricity produces will be sold to Electricity of Vietnam (EVN), the country's largest power company, through an offtake agreement. The new plant is scheduled to start generating electricity in March 2011 and is expected to be fully operational by January 2012.

"By March 2011, electricity generated from this plant will contribute towards meeting the increasing power demands throughout the country and to consolidate the position of PetroVietnam as the second leading power generation entity in Vietnam after EVN," Hoang Xuan Quoc, the CEO of PetroVietnam Nhon Trach 2 Power Joint Stock Co, said in a press release. He noted that the Nhon Trach 2 power plant is part of the National Electricity Master Plan and referred to it as a "project of national importance".

The borrower is 62.8% owned by Petrovietnam, and its remaining shareholders comprise several leading state-owned enterprises including EVN and Vinacomin, as well as J-Power of Japan. The latter explains the interest that Nexi has in supporting the deal.  

The Germans, meanwhile, also have a direct interest in this project as Siemens is a sub-contractor for the construction work.

ECA-backed financing has become increasingly big business since the financial crisis when liquidity was in short supply as banks pulled back on lending because of capital constraints and the bond market dried up for everyone but the top-rated issuers. The support from various ECAs ensured that projects that were helping to sustain exports from their respective countries got the necessary funding to be able to proceed, thus helping to keep their economies ticking over during the crisis.

"This is one of our key focus areas. Over the past couple of years, we have seen the volume of overall debt that we have provided grow multi-fold," Panigrahi said, adding that Citi has helped provide ECA-backed financing to a variety of projects in the region across sectors, including shipping, aviation, aircraft financing, telecom and power.

"In addition to that, we are working on a number of mandates in the mining sector, in the infrastructure development space, and in a whole host of sectors which are basically the target for a lot of governments as they are looking to kick-start their economies and sustaining growth," he said.