Phu My 3 BOT Company Limited (Phu My 3) signed core financing documents recently (June 2003) and will shortly achieve first drawdown. The Phu My 3 Power Project (the Project) is not the first BOT project to be structured on a limited recourse basis in Vietnam (it was preceded by the Thu Duc Water Project, although that project is now not proceeding for commercial reasons, and the Phu My 2-2 power project: both projects on which Freshfields Bruckhaus Deringer worked).
However, it does set a new benchmark in the structuring of true limited recourse financing in Vietnam, with the potential for application of many of its features in other developing-world infrastructure deals.
The transaction posed a number of fundamental legal and commercial challenges, which needed to be overcome. These included:
The Project does not benefit from any "customary" third party, full-works operation and maintenance arrangement or a comprehensive technical assistance agreement, which might usually be expected to be instituted in place of such an arrangement. The lenders were convinced to accept the position of Phu My 3, that an owner-led operation and maintenance programme could sufficiently mitigate operation and maintenance risk.
This was achieved during financing negotiations by the development of a layered contractual matrix covering operation and maintenance. That matrix included certain long-term maintenance obligations to be undertaken by Siemens, secondment support offered by sponsors, back-up/emergency operation and maintenance support and ancillary administrative technical assistance support.
Various covenants and other mitigating measures included in relevant project and financing documents augmented the project contractual structure to ensure to the greatest extent possible that no risks could fall between the various agreements in place and/or between the various responsibilities.
An innovative mechanism was integrated into the financing documents to permit Phu My 3 to maintain a secondary fuel reserve without actually having to buy and store a fixed quantity of fuel, by incorporating a "shadow" financial reserve indexed to the prevailing heavy fuel market price and adjusted on the basis of the first-in, first-out principle.
Political risk coverage for loans
The Project marked the first occasion on which ADB utilised its new form of political risk coverage guarantee. It was also the first time that, pursuant to their 2002 cooperation memorandum of understanding, ADB and MIGA sought to make terms of their cover as consistent as possible.
While extensive negotiation of the terms of political risk coverage always presents unique challenges for commercial lenders and their counsel, this was made more so by the (naturally) different perspectives of each of ADB and MIGA and the need to achieve a balance between ensuring sufficient consistency of drafting between each political risk guarantee whilst reflecting the subtle differences of intent and approach of each institution on some issues.
The Project offered other challenges in the context of negotiating political risk cover for the commercial loans. The project documents, in conjunction with the direct agreements negotiated by the lenders with the Vietnamese Government provided, among other things, mitigation of foreign currency availability, conversion and remittance risk and offered various concessions in relation to compliance with particular Vietnamese laws and regulations.
The challenge in negotiating the political risk insurance was to ensure that "standard" coverage terms were adapted to complement the concessions that had already been granted by the Vietnamese Government in either relevant project documents or direct agreements.
A further challenge involved structuring mechanisms to mitigate a usual difficulty for commercial lenders: that should borrower cashflows be insufficient to cover premia payments for reasons other than a covered event, ongoing preservation of the cover may depend on the commercial lenders themselves paying the premia. This risk was mitigated in a variety of ways, from the establishment of premia reserve mechanisms to a restructuring of the manner in which the premia was ultimately recoverable from Phu My 3 in order that, should a covered event occur, amounts which were not recovered might also qualify for political risk coverage.
An added complexity in devising such a structure was the need also to consider the position of the development lenders which, not having the benefit of the political risk coverage, could not readily accept any mechanism that might structurally subordinate them in respect of any amounts payable from the cashflow waterfall and directed ultimately to settle premia due to ADB, MIGA or NEXI.
Political risk coverage for interest hedging
A further innovation for the Project was MIGA's willingness to offer, for the first time, political risk coverage to the counterparties to interest hedging arrangements entered into with Phu My 3. This necessitated a wholesale review and reconsideration of the structure of MIGA's standard terms of coverage, based as they are primarily on loan outstandings rather than amounts due under swap contracts.
Negotiation of the political risk swap coverage involved the extent to which the benefit of the coverage would extend beyond simply any close-out payments due on termination.
Intercreditor issues are always fertile with challenge. In addition to the intercreditor issues alluded to above, the Project also brought together a successful structure under which the concerns of the multilaterals, where the crystallisation of a claim by lenders against a host government may not immediately figure high on their order of deal priorities, were reconciled with the concerns of covered commercial lenders where such crystallisation is a necessary first step in accessing the benefits of political risk coverage.
Financial close of the Project and first drawing will see a number of important milestones achieved: a further step in reinforcing market confidence in limited recourse financing in Vietnam; the expectation that MIGA/ADB cooperation in political risk coverage will result in future collaboration in a region where increasingly deals are being done on a covered basis and the development of political risk coverage for swap exposures.
Details about the project
The Project is being undertaken by Phu My 3, the shareholders of which are BP Holdings BV (a subsidiary of BP plc), SembCorp Utilities Pte Ltd, Kyuden International Corporation (a subsidiary of Kyushu Electric Corporation) and Nissho Iwai.
The Project comprises the development and operation of a 716.8 MW combined cycle gas-fired plant, currently being constructed under a full turnkey construction contract by Siemens AG (two gas turbines, two heat recovery and steam generation system and one steam turbine).
The BOT concession issued to Phu My 3 has a term of 23 years and operates in conjunction with a 20 year power purchase agreement with Electricity of Vietnam (EVN), gas being supplied under a matching 20 year gas supply agreement with the Oil and Gas Corporation of Vietnam (PetroVietnam).
While Phu My 3 has the benefit of an extended maintenance contract with Siemens, it has instituted its own long term maintenance and operation regime, supported in various ways by shareholders and their related companies via technical service, secondment and emergency back-up arrangements.
Funding for the Project is $412m, with a 75% debt component. The debt is divided between development funding (to be advanced by Asian Development Bank ($40m) and Japan Bank for International Cooperation ($103m)) and commercial bank funding to be advanced under three facilities by lead arrangers Fortis, Mizuho, Credit Agricole, Credit Lyonnais and Bank of Tokyo-Mitsubishi.
Each commercial facility is supported by comprehensive political risks cover: a $95m facility covered by Nippon Export and Investment Insurance, a $43m facility covered by Multilateral Investment Guarantee Agency and a $32m facility covered by Asian Development Bank. In addition, swap contracts entered into to satisfy minimum required interest rate coverage also have the benefit of political risk coverage from MIGA.
A full onshore/offshore security package, together with a comprehensive direct agreement regime, insurance package and extensive mechanisms to maximise revenue conversion to US dollars and its expatriation, completes a highly structured and sophisticated project financing.
An edited version of this article first appeared in IFLR, Sept 2003.