Syndicated loans in project financing for energy projects in Vietnam

May 2021 | EXPERT BRIEFING | FINANCE & INVESTMENT

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The Doi Moi Policy, launched in 1986, helped Vietnam transition from a closed economy to a market-oriented one and opened the country to foreign investors. Vietnam’s success was facilitated by its accession to the World Trade Organisation (WTO) in 2007, which drastically reduced restraints on foreign investments. Thanks to these political and economic reforms, Vietnam’s GDP grew at an average of 6.22 percent between 2009 and 2019. In 2020, Vietnam was one of very few countries to experience positive growth amid the COVID-19 pandemic, with GDP growth of 2.91 percent thanks to its government’s successful management of the pandemic. These successive reforms have also had a positive effect on the development of industrial projects by foreign investors, particularly in the energy sector.

While Vietnam’s economic growth has been remarkable, it may experience a power shortage in the years to come. The country’s actual power supplies do not cover the growing demand for energy needed to sustain rapid economic development and population growth. The government made several commitments to reducing public debt and, as a result, is limiting the development of public projects. Consequently, the financing of projects by foreign lenders is necessary, and limitations to such financing will need to be addressed soon.

This article suggests a solution to one current limitation on projects in Vietnam being financed by foreign lenders. Due to Vietnam’s specific approach to land property rights, mortgages in favour of foreign lenders are prohibited. We will first explain limitations on the granting of securities over land and then propose a practical solution: the appointment of a Vietnamese bank in a syndicated loan. This article does not address build-operate-transfer and public-private partnership projects, where mortgage of land to offshore entities is, under specific conditions, permitted.

Limitations to securities on land and land assets

In general, lenders in project finance transactions use the proceeds from the operating project to repay their loans, which are often secured by mortgages over the project site and assets attached to it, among other classic securities.

Vietnamese law also recognises foreign lenders’ right to take security, but differentiates between moveable and immoveable properties, such as land and land-use rights. Local companies’ right to grant mortgage over land-use rights and assets attached to the land is, however, not directly possible.

The reason for this limitation lies in Vietnam’s specific conception of land tenure. In theory, private ownership does not exist, and commercial ownership of land does not exist in practice. The land belongs collectively to the people and is managed exclusively by the state. The state then grants to individuals and legal persons the right to use the land, either via allocation or land lease. These land-use rights are different from the usus real right in most civil law jurisdictions (the mere right to use a property) as owners of land-use rights can transfer, sublease or mortgage them.

The extent of these rights is, however, dependent of several legal requirements, such as how payment is made, be it a one-time payment or annual payment, and how land-use rights are granted, be it via land allocation or land lease. In particular, a local company many only mortgage land-use rights and assets attached to the land if the land has been allocated by the state in exchange for a land use levy, or if the land is leased from the state but payment for the whole term of the lease has been made. However, if the local company pays an annual lease to the state, it is only permitted to mortgage the assets attached to the land but not the land-use rights.

Furthermore, local companies may only mortgage their land-use rights and assets attached to the land to banks licensed and operating Vietnam (local credit institutions). This clearly deprives foreign lenders from of an efficient security that is commonly used in other jurisdiction for projects financing. To overcome this prohibition, foreign lenders can consider joining force with a local credit institution.

Syndicated loan structure

In Vietnam, offshore lenders are a significant source of financing for large projects, since onshore lenders have more limited funds. Notably, the use of syndicated loans, despite still being limited, has also increased in the past decade, due to larger projects being developed, especially in the energy industry. More recently, every large traditional energy project has benefitted from syndicated loans, including the Phu My projects and Mong Duong 2.

Under Vietnamese law, syndicated loans are governed by the 2010 Law on Credit Institutions as amended on 20 November 2017, and several guiding legal documents, including Circular 42/2011/TT-NHNN, as amended by Circular 24/2016/TT-NHNN on 30 June 2016 to include syndicated loans made by offshore entities (collectively, “Circular 42”).

The assignment of security is not a valid form of security and, as such, the enforcement by an offshore lender of an assigned security would not be granted by the Vietnamese courts. However, the Law on Credit Institutions gives local credit institutions that are lenders in syndication the right to act as security agent or trustees for offshore entities. In practice, some local credit institutions have acted as security agent, for offshore lenders without being lenders in the syndication, and the State Bank of Vietnam still approved the registration of the foreign loan. However, local credit institutions are still reluctant to act as security agents for foreign lenders to take mortgage over immoveable assets.

Furthermore, Circular 42 provides that syndication agreements “must comply with the provisions of [Vietnamese law]” and include details that are listed in the Circular. As a consequence, foreign lenders have to use a specific and complex structure to bypass prohibitions on mortgages immoveable assets with agreements that complement each other.

The first agreement is a credit agreement that complies with Vietnamese law and all mandatory provisions of Circular 42. The local credit institution will be considered as a lender by paying a small sum to fully comply with the provisions of Circular 42. The local credit institution will then contract an immovable mortgage agreement with the project developer, according to which the proceeds from the enforcement of the mortgage will become secured assets under a third agreement. The mortgage of assets attached to a land is included in the mortgage of the LUR itself and enforcement can either be done by way of auction or sale, depending on the choice of the parties to the mortgage agreement.

The third agreement is a typical movable asset mortgage agreement concluded between the borrower and the local credit institution, in which the latter will act on behalf of the foreign lender.

Finally, an intercreditor agreement will structure the interactions between each lenders. According to this agreement, the local credit institution acts as a security agent on behalf of the offshore lenders, and the securities under the movable asset mortgage agreement (the proceeds for enforcing the secured assets under the immoveable mortgage agreement) will be distributed from the local credit institution to the offshore lenders. Parties often choose a foreign law to govern this agreement.

Conclusion

To date, there has not been any precedent on the enforcement of a mortgage by a credit institution in favour of offshore lenders. Vietnamese courts could take the view that offshore lenders are the ultimate beneficiaries of the mortgage and, as such, the prohibition on mortgage of immoveable assets should also apply to the syndicated loan structure. Despite this uncertainty, this structure is more frequently used in project finance, as land assets attached to the land are of substantial value.

Eli Mazur is a partner and Thibaut Alibert is a paralegal at YKVN LLC. Mr Mazur can be contacted on +84 (28) 3822 3155 or by email: eli.mazur@ykvn-law.com. Mr Alibert can be contacted on +84 (28) 3822 3155 or by email: thibaut.alibert@ykvn-law.com.

Eli Mazur and Thibaut Alibert

YKVN LLC