Domestic sponsors and foreign lenders alike should be prepared to live with a stricter regime with respect to issuing government guarantees and undertakings (GGU) in Vietnam from 1 March 2017.
Currently, the issuance of GGUs is governed by Decree No. 15/2011/ND-CP issued in 2011 ("Decree 15"). Under Decree 15, the Vietnam government has reportedly guaranteed a total amount of USD10.75 billion for projects in various sectors, including 21 power projects, two aircraft leases, and two mining projects.
Decree No. 04/2017/ND-CP ("Decree 04") will replace Decree 15 on 1 March 2017.
This note highlights the key provisions in Decree 04 that differ from Decree 15 so that sponsors and lenders can prepare for the belt tightening on sovereign guarantees imposed by Decree 04.
Longer Planning Stage
Under Decree 04, qualified project sponsors are required to prepare a three-year plan for GGU utilisation and to submit the same to the Ministry of Finance (MOF). This three-year plan must contain the following: (i) identification of the project; (ii) loan amount; (iii) financing form (i.e., loan or bond); and (iv) anticipated drawdown date. In addition, project sponsors who plan to apply for a GGU in a particular year are required to notify the MOF of their intent by October of the preceding year. This should contain information with respect to the three-year plan as discussed above, and also details regarding the status of obtaining the Prime Minster's in-principle approval and the loan amount to be utilised in that year.
Stricter Conditions on Eligibility
In addition to the provisions contained in Decree 15, Decree 04 includes additional conditions that borrowers are required to satisfy for GGU eligibility, including:
- minimum equity investment in the project at 20 percent;
- debt-to-equity ratio must not exceed 3:1 based on the last audited financial statements;
- sponsor (or group of sponsors) who hold 65 percent or more of equity in the project company must guarantee the financial obligations of the project company; and
- debt service coverage ratio within the first five years of the project's life cycle must be at least 0.9:1 for those projects that have a guaranteed off-take agreement (or at least 1:1 for other projects).
Lower Cap on Guaranteed Amount and Higher Fees
Decree 04 provides three different thresholds with respect to the guaranteed amount as compared with a single threshold of 80 percent under Decree 15. Accordingly, the following caps will apply to different types of projects:
- a maximum of 70 percent of the total investment capital for projects that must be implemented on an urgent basis, and they are approved by the National Assembly or by the Prime Minister;
- a maximum of 60 percent of the total capital investment for "A group projects" (as defined under Vietnam's construction law, which includes certain energy projects) with a total capital investment capital of at least VND2,300 billion (about USD200 million) that are approved by the Prime Minister; and
- a maximum of 50 percent of the total investment capital for other projects.
The fee cap on guarantees will increase up to 2 percent, as compared to 1.5 percent under Decree 15.
What is the rationale to tighten the belt on the GGU regime? A clear goal is to control public debt, which has ballooned in recent years to a reported 64 percent of Vietnam's GDP in 2015, according to The World Bank. The National Assembly has set a ceiling on public debt of 65 percent for the period of 2016 to 2020.
One possible consequence of a stricter GGU regime, whether intended or not, is that domestic investors in the power and infrastructure sector may look to engage the Vietnam government in a partnership using more traditional public-private partnership structures that have been historically overlooked in Vietnam.