Vietnam has been nominally open to foreign investment since the late 1980s, but the country has had to wrestle with repeated devaluations to its currency and assuage lenders’ doubts about its willingness and ability to honour its obligations and those of state-owned enterprises.

Nghi Son Refinery & Petrochemical LLC

STATUS

Signed 4 June 2013

SIZE

$9 billion

DESCRIPTION

Refinery complex in Vietnam’s Thanh Hoa province

SPONSORS

Idemitsu Kosan (45.1%), Kuwait Petroleum (45.1%), PetroVietnam (5.1%), Mitsui (4.7%)

MANDATED LEAD ARRANGERS

Alahli Bank of Kuwait, ANZ, Aozora Bank, Apicorp, BTMU, Chiba Bank, Commercial Bank of Kuwait, Commerzbank, Credit Agricole, DBS, DBJ, DZ Bank, HSBC, KDB, KfW-IPEX, Mitsubishi-UFJ Trust & Banking Corp, Mizuho, Mizuho Trust & Banking Corp, National Bank of Kuwait, Natixis, Norinchukin Bank, Overseas-Chinese Banking Corp, Shinkin Central Bank, Shinsei Bank, Shizuoka Bank, Siemens Bank, SMBC, Societe Generale, Sumitomo Mitsui Trust, Tokyo Star Bank, Yamaguchi Bank

ECAS

Coface, ECGD, Euler Hermes, JBIC, Kexim, NEXI, SACE

SPONSORS’ FINANCIAL ADVISER

BTMU

ECAS’ FINANCIAL ADVISER

Ernst & Young

SPONSORS’ LEGAL ADVISER

Allens Linklaters

LENDERS’ LEGAL ADVISER

Allen & Overy

TAX ADVISER

KPMG

INSURANCE ADVISERS

Aon, Willis

TECHNICAL ADVISER

Nexant

ENVIRONMENTAL ADVISER

ERM

MARKET CONSULTANT

Pervin & Gertz

EPC CONTRACTORS

GS, JGC, SK, Technip

The country has a fairly standard template for power projects, which includes an irrevocable guarantee to fully cover the payment obligations and financial commitments of Vietnamese counterparties, and also a complete guarantee on conversion and availability of foreign exchange.

The government has frequently tweaked this framework, most recently for the $1.95 billion Mong Duong independent power project. Mong Duong was previously the largest financing to close in Vietnam, and featured heavy export credit agency (ECA) and international lender support, but had a risk risk allocation that was robust enough to appease lenders.

The difficulty for the sponsors of the $9 billion Nghi Son refinery project was that the government sought to minimise its guarantee exposure from the outset and was only willing to extend a partial guarantee on foreign exchange. Government reluctance stems from one of the project’s credit strengths – that it is exporting fuel products and benefits from US dollar-denominated revenue streams, unlike conventional power projects which have no choice but to sell their output locally.

To get lenders comfortable with the currency risk the sponsors had to develop an unusual financing structure that used two separate cash waterfalls, in effect prioritising the cash generated from dollar-denominated exports for debt service. Despite this, the sponsors were able to win the support of 31 commercial lenders in a tight timeframe.

The project entails the development of an oil refinery complex in the Tinh Gia district of Thanh Hoa province, around 180km south of Hanoi. The project will have an annual capacity of 7 million tonnes of crude oil, a polypropylene plant with an annual capacity of 150,000 to 350,000 tonnes and a polyester fibres plant that is expected to produce 260,000 tonnes per year (tpy).

The project company’s two largest shareholders are Japanese petrochemicals company Idemitsu Kosan and Kuwait Petroleum, the national oil company for Kuwait, each of which has a 35.1% shareholding. The other shareholders comprise Vietnam’s PetroVietnam and Japanese conglomerate Mitsui, which have 25.1% and 4.7% stakes, respectively. The sponsors are providing pro rata completion guarantees on the financing.

The sponsors set up a joint venture company in 2008 to develop the project and started negotiations with the government about investment guarantees shortly afterwards. The sponsors agreed a guarantee package with the Vietnamese government towards the end of last year, issued a preliminary information notice to lenders in January and sought commitments by the end of March.

The deal was heavily oversubscribed, meaning that the sponsors were forced to scale back commitments, and were also able to dispense with a financing commitment from the International Finance Corporation (IFC), which had offered a A/B loan package, but whose presence had complicated matters with some ECA lenders because of disagreements about preferred creditor status.

The deal signed at the beginning of June as $5 billion in 16-year debt from the club of 31 banks and seven ECAs. The deal breaks down into a direct loan of $1.65 billion from JBIC, a $1.3 billion NEXI-covered loan, a direct loan from Kexim for $660 million, a $440 million loan covered by Kexim, and $950 million split across four tranches from four European ECAs – Coface, ECGD, Euler Hermes and SACE. The level of commitment from the European ECAs is still to be determined, although Coface is rumoured to be seeking the largest exposure out of the four.

The NEXI-covered loan featured 17 lenders: ANZ, Aozora Bank, BTMU, Chiba Bank, Commerzbank, Credit Agricole, DBJ, DBS, Mitsubishi UFJ Trust & Banking, Mizuho, Mizuho Trust & Banking, OCBC, Shinsei Bank, Shizuoka Bank, Societe Generale, SMBC and Sumitomo Mitsui Trust.

The Kexim-covered loan attracted 21 lenders: ANZ, BTMU, Commerzbank, Crédit Agricole, DBJ, DBS, HSBC, KDB, KfW-IPEX, Mitsubishi UFJ Trust & Banking Corp, Mizuho, National Bank of Kuwait, Natixis, Overseas-Chinese Banking Corp, Shinsei Bank, Siemens Bank, SMBC, Societe Generale, Sumitomo Mitsui Trust, Tokyo Star Bank and Yamaguchi Bank.

The 24 lenders for the four other ECA-covered tranches are Alahli Bank of Kuwait, ANZ, Apicorp, BTMU, Commercial Bank of Kuwait, Commerzbank, Crédit Agricole, HSBC, DBS, DBJ, DZ Bank, KDB, KfW-IPEX, Mitsubishi UFJ Trust, Mizuho, National Bank of Kuwait, Natixis, Norinchukin Bank, Overseas-Chinese Banking Corp, Shinkin Central Bank, Siemens Bank, SMBC, Societe Generale and Sumitomo Mitsui Trust.

The pricing on the debt ranges between 210bp and 240bp over 6-month Libor with the exception of the SACE-guaranteed tranche, which is slightly higher than 300bp, because of the risk attached to the Italian sovereign credit. The financing is rounded off with $4 billion in equity and a working capital facility from the sponsors, which is indexed to the price of crude oil.

The sponsors extended some typical supports to lenders, which probably helped increase their comfort. In addition to a cash sweep mechanism, the deal features a robust security package, including a pledge over all project assets, including shares in the project company, immovable assets and mortgage rights.

The working capital facility is designed to provide a bridge in the event of a short-term problem with currency conversion problem, but the real ingenuity in the mitigation of the foreign exchange risk lies with the operation of the two cashflow waterfalls. Since part of the project’s revenue derives from offtake agreements with Japanese and Kuwaiti purchasers, which are dollar-denominated, the export cash flows are segregated in an offshore account.

Locally-generated cashflow, mostly from the sale of refined petroleum products such as diesel and gasoline to Vietnamese offtakers, follows the normal project finance order of priority, meaning that the cash is earmarked for operating expenses first, followed by debt service, whereas for the export cash flows this order of priority is reversed, providing a buffer for lenders in the event that conversion issues arise.

While project bankers continue to insist that the Vietnamese government will have no alternative but to offer a more robust guarantee package for future projects, the financing for Nghi Son shows how this can be achieved in its absence. Given the increased competition in the Vietnamese petrochemicals sector, with several foreign developers eyeing up opportunities, Nghi Son could even provide a template.

Thailand’s national oil company PTT recently received preliminary approval from the Vietnamese government to build a new refinery and petrochemicals plant in the south-central province of Binh Dunh. PetroVietnam, which already operates the Dung Quat refinery in neighbouring Quang Ngai province, has plans to develop two further refineries, and opposes PTT’s complex, citing concerns about market saturation if it were to go ahead.

PTT is expected to get win full approval later this year, once it completes is feasibility study. Government is keen to develop more big-ticket projects because they improve energy security and showcase Vietnam’s credentials in attracting foreign investment. Given the interest from investors, several from overseas, bankers might have to get used to these deals featuring less lender-friendly terms than they would hope for.