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;
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
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
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
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.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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