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: