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1 December 1999
PROJECT FINANCING IN THAILAND
Project financing is a well-established method of financing major projects in Thailand, in both the private and public sectors.
The financial crisis triggered on July 2, 1997 slowed the process of closings of project financings, especially those in which Thai banks and finance companies played large roles.
Recent examples of major project financings include:
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BTSC: |
1996 US$ 604 million and Baht 15,620 million financing of an elevated train project in Bangkok to be built and operated by Bangkok Mass Transit System under a concession from BMA. |
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TECO: |
1998 US$ 405 million and Baht 350 million financing of a 700 MW power plant to be built and operated by Tri-Energy Company Limited under a power purchase agreement with EGAT. |
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NSM: |
1998 US$ 453 million 144A financing of a steel mill by Nakornthai Strip Mill. |
This paper assumes the reader is familiar with project financing in general, and is limited to a summary of the unique elements of Thai project financings.
No special government approvals are required for project financings, other than the usual approvals associated with unsecured loan transactions, security by way of mortgage and licensing required under Thai laws. The liberalization of exchange controls in the early 1990’s has largely eliminated concerns about exchange controls in project financings, although Bank of Thailand approval is required for the opening of offshore bank accounts by Thai borrowers.
No Thai government guarantees have been available in recent years, even for projects involving state enterprises as borrowers.
Assuming more than one lender group (for example, foreign commercial bank lenders, Thai commercial bank lenders, export credit agencies, and international financial institutions), there will usually be a need for a separate security or inter-creditor agreement between lenders, security agents and borrower, setting forth the details of security, timing of establishing security interests, coordination and voting procedures, procedures for enforcement of security, and sharing of proceeds from enforcement of security and insurance.
The governing law issue is frequently resolved in practice in favor of foreign law to govern the security agreement and foreign credit agreements. Foreign law will also govern certain security, such as charges over foreign bank accounts, guarantees of foreign persons and assignments of project documents governed by foreign law. Thai law is generally the governing law under Baht credit agreements and security documents re property and rights in Thailand.
Prior to 1998, the Thai Bankruptcy Act did not include provisions similar to Chapter 11 under U.S. bankruptcy law or equivalent provisions to facilitate a work-out in case the borrower became insolvent. In practice, this gave rise in project financings to a requirement for assignments of rights under project documents in favor of a substitute entity to be nominated by the lenders. However, because most licenses and permits associated with a major project cannot be transferred, the enforcement of security by way of assignment will leave certain licensing and tax issues to be addressed.
In 1998, the Thai Bankruptcy Act was amended to provide for reorganization proceedings. Further amendments in 1999 were enacted to resolve issues which had not been adequately addressed in 1998. On June 18, 1999 the new Bankruptcy Court opened. It is too early to predict the efficiency and time frames involved in reorganization proceedings, but it is very likely that work-outs in the future will be conducted under reorganization proceedings instead of exercise of rights under assignments of rights to substitute entities.
Forms of Security in Thai Project Financings
Thai law provides traditional forms of security, i.e. mortgages of land and buildings, pledges, mortgages of registered machinery, and sales with right of redemption. There is no equivalent of a “floating charge” on inventories or work-in-progress, or “charge” on a bank account. Certain classes of creditors have “preferential rights” under the Civil and Commercial Code (“CCC”).
Elements of a security package in a major industrial project in Thailand may include some of the following:
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(1) |
Mortgage of land and buildings. In the case of projects constructed on leased land, a conditional assignment of the land lease may be feasible. |
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(2) |
Mortgage of registered machinery. The mortgage may only be registered after import and installation of the machinery, and after registration of ownership of the machinery under the Machinery Registration Act. |
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(3) |
Interim security on imported goods by way of pledges. This form of security is required to cover the gap in time between import of machinery and construction materials, and registration and mortgage of the machinery or mortgage of a building. Thai counsel are divided as to whether this form of security is effective. A pledge poses practical problems in having to trace specific imported goods for the entire period until the time of mortgage of machinery. There is the need to maintain possession in a third party (e.g. construction contractor) on behalf of the pledgees. Issues of liabilities and indemnities often arise to frustrate these arrangements. To the extent that lenders are interested primarily in post-completion security, this element is not applicable. |
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(4) |
Guarantees and/or cost overrun agreements by shareholders, and completion guarantees by contractors or sponsors. |
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(5) |
Take or pay agreements or other offtake agreements with customers. |
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(6) |
Assignments of rights under contracts. In recent years it has become common for banks to require immediate or conditional transfers of rights and obligations of all major contracts, to hopefully facilitate a “workout” utilizing a substitute project vehicle. Under Thai law only rights (not obligations) may be assigned, with consent of or notice to the debtor. A novation is required in the case of an assignment of obligations. Thai counsel have reservations about the practicability of enforcing such assignments of “rights” which involve activating a new project vehicle, because very few of the licenses and permits which will be obtained by a project owner are transferable. A BOI promotion certificate is not transferable. Customs duty and business tax may be payable on goods imported duty free, if they are transferred within 5 years. Thai counsel also have reservations about the enforceability of immediate transfers of rights in cases in which the borrower retains any significant rights over the assigned property. |
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(7) |
Insurance, on terms and conditions approved by lenders, with “loss payee” clauses under insurance policies and/or assignments of insurance. In some cases banks seek an interest in reinsurance by way of “cut through” clauses or assignments. The rights of beneficiaries under “loss payee” clauses are reinforced by the rights of third party beneficiaries under the CCC. |
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(8) |
Pledges of stocks and other movables. Establishing a pledge requires satisfaction of elements of a pledge as prescribed in the CCC, including pledge of “specific goods”, and possession of the goods in the pledgee or third party. There is no “pledge substitution” concept under Thai law. In major project financings in Thailand, the use of pledges on inventories has been explored in depth, but is usually rejected for practical considerations. In smaller projects informal pledges of inventories are established, utilizing segregated areas of factories with signage and nominal third-party supervision. Thai counsel have reservations about the validity of the pledge of inventories or machinery because the degree of control which the pledgor retains over the pledged property. |
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(9) |
Assignments or pledges of bank accounts and cash control arrangements, such as joint signature requirements, pledge of commercial paper, etc. There are mixed views on the validity of assignments any pledges of bank accounts, compared to rights of set off. |
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(10) |
Custody of important documents, such as insurance policies, title documents, etc. |
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(11) |
Assignment of receivables. As in item (6) above, the consent of or notice to the debtor is required to perfect an assignment. |
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(12) |
Derivative instruments and swaps for hedging. |
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There is some use in paying agents/trustees/escrow agents, although there are legal and tax uncertainties. Offshore reserve accounts in foreign exchange have become common, and are approved by the Bank of Thailand on a case-by-case basis. There are 3-month and 1-year preference periods under the Bankruptcy Act, which create legal uncertainties in the case of transfer of rights and certain other of the above forms of security. However, these forms of security may have value, such as blocking attachments by third parties, outside the bankruptcy context. Taking pledges of the shares of borrowers in major projects is not common, due to share transfer restrictions and other reasons. Major projects in Thailand are usually promoted by the Board of Investment (“BOI”) under the Investment Promotion Act, B.E. 2520. Conditions of promotion include a requirement for BOI consent to mortgage of machinery which has been imported exempt from customs duty. A statutory exchange assurance is available to foreign lenders under the Act, subject to a routine approval of the BOI. Legal Opinions in Thai Project Financings Legal opinions issued in connection with project financings in Thailand contain a number of qualifications, some of which are common to those found in English law or New York law legal opinions in similar transactions. Qualifications unique to Thai projects deal with the following subjects: |
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The security available under Thai law and documentation associated with project financing have become well-understood by major foreign lenders to Thai projects. Nevertheless, it is strongly recommended that termsheets for proposed project financings spell out the elements of the security package in detail, in order to avoid misunderstanding at later stages, particularly in financings which include foreign lenders who have not had any past experience in Thai project financings. Proposed New Legislation A draft Secured Lending Bill is being drafted by the Ministry of Justice and has been given priority status by the MoF and BoT. It is expected that this proposed law will provided for non-possessory security interests, analogous to floating charges in England. A. T. Chandler |
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