A new regulation took effect from 1 March 2017 on Vietnam sovereign guarantees for loans, commonly referred to as MOF Guarantees. Decree 04 imposes more stringent conditions on the issuance of MOF Guarantees compared with its predecessor; it will make it more difficult to obtain MOF Guarantees for financings of major State-owned enterprises and their projects, and, consequently, for foreign-sourced funding for such projects.
This note is relevant to international banks, export credit and multilateral agencies, contractors, equipment suppliers and others who are active in procuring financing for Vietnamese companies for large-scale power, infrastructure and natural resource projects.
New regulation Decree 04/2017/ND-CP (Decree 04), effective from 1 March 2017, replaces Decree 15/2011/ND-CP (Decree 15) as the principal Vietnamese law relating to the issue of sovereign guarantees for loans, mainly made to Vietnamese State-owned enterprise (SOE) borrowers. In practice, this type of debt guarantee is normally referred to as an MOF Guarantee, as the Ministry of Finance (MOF) takes the lead in assessing and negotiating the guarantee on behalf of the government; it differs from the government guarantee and undertakings (GGU) that are normally issued for projects designated as being of national importance, such as BOT power projects. The list of projects eligible for the MOF Guarantee under Decree 04 will be published by the Prime Minister from time to time.
Decree 04 builds on the Decree 15 requirements by imposing more stringent conditions for the issuance of MOF Guarantees compared with the previous Decree 15. This raises a number of issues for international lenders to consider when structuring financings in Vietnam, and Decree 04 might effectively prevent private investors from obtaining MOF Guarantees in future. Some of the issues are described below.
• Decree 04 maintains the previous requirement that the guaranteed party or the borrower must mortgage those assets financed by the MOF guaranteed loan in favour of the MOF unless otherwise approved by the government. This continues to mean that it will remain difficult to use MOF Guarantees to finance joint venture projects.
• A parent company or shareholders who together hold 65% or more of the equity interests in the borrower must guarantee the borrower’s repayment obligation in the event the borrower faces difficulty in debt service. This is a significant additional requirement.
• Major shareholders (i.e. any shareholders holding 5% or more of the borrower’s charter capital/equity) continue to be required to undertake that they will maintain an aggregate 65% shareholding during the term of the MOF Guarantee. Any transfer of shares to other investors, including existing shareholders, must be approved by the MOF.
• A letter of guarantee must contain certain provisions required by Decree 04 and parties can include additional provisions provided that those provisions must not be contrary to Vietnamese law. In practice, this provision (although not new) requires an English law guarantee to comply with Vietnamese law. However, a legal opinion from the Ministry of Justice may give some comfort to the lenders.
• Any assignment of the guaranteed loan must be approved by the MOF, as was the case under Decree 15.
• Decree 04 imposes tighter required debt to equity ratios for borrowers, being 75:25, increased from the 80:20 ratio under Decree 15.
• Decree 15 imposed a flat cap on the guaranteed amount of 80% of the investment capital required for an SOE-sponsored project. Decree 04 replaces this with a three-tiered cap on the amount of guaranteed debt as a percentage of the investment capital depending on the size or importance of the project, each of which is lower than the Decree 15 cap.
Decree 04 was issued as a means of limiting the continuing rise in Vietnam’s public debt, which stood at around 64% of 2015 GDP according to the World Bank. However, as a consequence, Decree 04 will make it more difficult to obtain MOF Guarantees for financings of major SOEs and their projects, and, as a result, for foreign-sourced funding for such projects – this at a time when Vietnam needs to develop much-needed infrastructure. This may mean that other means of government support or offshore financing will need to be used for large-scale Vietnamese power, infrastructure and other projects; for example, through the use of GGUs, and that a more concerted effort be made to more effectively utilise BOT/PPP schemes in Vietnam than has been achieved to date.