The ins and outs of project finance in Thailand

Author: | Published: 1 Jul 2012
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Project financing is a well-established method of financing large projects in Thailand, in both the private and public sectors. Some recent examples of significant project financings are given in Table 1.

Recent significant project financings in Thailand
General Motors THB13.5 billion ($425 million) financing of new truck, SUV and diesel projects (November 2009)
Hongsa $2.76 billion financing of 1,876 MW lignite fired power plant in Lao PDR (November 2010)
Sindicatum THB583 million refinancing of two waste gas VSPPs (April 2011)
Biomass Electricity THB8 billion project financing wood chip SPP (June 2011)
Bangpa-In Power THB5 billion project financing gas-fired SPP (signed March 2011)
Solarta THB3.3 billion project financing solar VSPPs (June 2011)
SunEdison Multiple project financings of solar VSPPs (2011-2012)
KFW and KR2 Two THB4 billion+ project financing of wind farms (August and December 2011)
Xayaburi Project financing of 1,285 MW hydro power project in Lao PDR (April 2012)

In Thailand, 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 liberalisation of exchange controls in the early 1990s 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. Since 2005, the Bank has declined to approve requests to open offshore reserve accounts, with limited exceptions.

No Thai government guarantees have been available in recent years, even for projects involving state enterprises as borrowers.

Assuming more than one lender group is to be involved (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.

There are a number of differences between US law market practice, English law market practice and Thai law market practice, which need to be addressed.

The governing law issue is frequently resolved in practice in favour of foreign law to govern the common terms 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 will be the governing law under Baht credit agreements and security documents with respect to property and rights in Thailand.

Dispute resolution provisions generally prescribe submission to courts, foreign or Thai. Foreign court judgments are not enforceable in Thailand. There are several recent precedents for dispute resolution by international arbitration. Arbitration awards are enforceable in Thai courts, subject to exceptions along lines of those in the NY Convention.

Before 1998, the Thai Bankruptcy Act did not include provisions similar to Chapter 11 under US 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 favour of a substitute entity to be nominated by the lenders. However, because most licences and permits associated with a large 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 reorganisation 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. Work-outs are now usually conducted under reorganisation proceedings instead of exercise of rights under assignments of rights to substitute entities.

Promotion of renewable energy projects

On December 26 2006, the National Energy Policy Committee (NEPC) approved the Electricity Generating Authority of Thailand (Egat) purchasing power from generators using renewable energy, and instructed Egat to revise its regulations for purchase of power from small power producers using renewable energy. On July 20 2010, the Thai Cabinet approved resolutions of the NEPC adopted on June 28 2010, including the NEPC's guidelines for coordination and follow-up of promotion of renewable power production in compliance with the policy, and establishment of a committee comprising representatives from such related agencies of Ministry of Education and National Economic and Social Development Board, and to approve a feed-in tariff system.

On January 28 2009, the Cabinet approved a 15-year alternative energy plan, and on March 9 of the same year, the NEPC approved additional tariff adders for certain categories of alternative energy. The announced goal was for renewable energy to constitute up to 20% of total energy consumption by 2022. Both Egat and the Provincial Electricity Authority published adder tariffs for renewable energy producers. On November 30 2011, the NEPC approved a 10-year 25% renewable and alternative energy development plan (2012–2021) to replace the 15-year plan. The Department of Alternative Energy Development and Efficiency is responsible for implementation of the alternative energy plan.

There is a growing market for carbon market finance in Thailand. The country established a Designated National Authority to manage CDM projects, currently the Thailand Greenhouse Gas Management Organisation. One hundred and ninety-one letters of approval for CDM projects have been issued, and there are 72 registered Thai CDM projects (as of June 29 2012).

Forms of security

Thai law provides traditional forms of security: 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.

A draft secured lending bill was drafted by the Ministry of Justice in the late 1990s and was given priority status by the Ministry of Finance and Bank of Thailand. This bill provided for non-possessory security interests over a range of property. On July 9 2009 the Cabinet approval the bill in principle, but it is still under review at the Council of State. The bill has not been introduced in Parliament.

Security in Thai project financings has a number of unique features. There are only limited forms of security: mortgage, pledge, right of retention, or creditor possessing preferential rights in nature of a pledgee. In addition, there are no floating charges (no security over moveable property, with some exceptions), no title insurance, no trustees, no mortgages of leaseholds or reclaimed land, no assignment of obligations, no concept of pledge substitution, and no specific security interest in bank accounts

There are also some differences in mortgage registration processes (land versus machinery).

In addition, the mortgage amount is fixed in Baht.

There have been interpretations under Foreign Business Operations Act with respect to inter-company loans, guarantees, leases, and so on. Finally, there are approximately 30 bi-lateral investment treaties in force) and the Asean Investment Promotion Treaty should also be borne in mind (although it is not in force).

Security packages

A security package in a large industrial project in Thailand may include some of the following elements.

Mortgage of land and buildings: In the case of projects constructed on leased land, a conditional assignment of the land lease may be feasible. Approval from the Ministry of Finance was previously required for foreign banks to be mortgagees under a land mortgage, but this rule was cancelled on August 3 2008.

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.

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 (a construction contractor, for example) 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 important.

Guarantees and/or cost overrun agreements by shareholders, and completion guarantees by contractors or sponsors can be included. Take or pay agreements or other off-take agreements with customers Are other options.

Assignments of rights under contracts: It is Thai practice for banks to require immediate or conditional transfers of rights and obligations of all big contracts, to hopefully facilitate a workout using 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 few of the licences 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 five 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.

Insurance, on terms and conditions approved by lenders, with "loss payee" clauses under insurance policies and/or assignments of insurance: Lenders normally require owner's insurance versus contractor's insurance cover. 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 Civil and Commercial Code. In case of cover by local insurance companies, reinsurance (95%) is normally required in the international market.

Pledges of stocks and other movables: Establishing a pledge requires satisfaction of elements of a pledge as prescribed in the Civil and Commercial Code, 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 large 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, using 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 substantial degree of control which the pledgor retains over the pledged property.

Assignments or pledges of bank accounts and cash control arrangements, such as joint signature requirements, pledge of commercial paper, and so on: There are mixed views on the validity of assignments and pledges of bank accounts, compared to rights of set off.

Custody of important documents, such as insurance policies, title documents, and so on, is another possibility.

Assignment of receivables: As for the assignment of rights under contracts, the consent of or notice to the debtor is required to perfect an assignment.

Derivative instruments and swaps for hedging are also used.

There is some use of paying agents/trustees/escrow agents, although there are legal and tax uncertainties. Offshore reserve accounts in foreign exchange were common, and required approval by the Bank of Thailand on a case-by-case basis; the Bank of Thailand adopted a policy not to approve offshore reserve accounts in 2005.

There are three-month and one-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 large projects is common.

Large 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, and mortgage of land which has been acquired with BOI approval. A statutory exchange assurance is available to foreign lenders under the Act, subject to a routine approval of the BOI.

Legal opinions

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. There are, however, a number of qualifications which are unique to Thai projects. The first is that an assignment does not fall within the definition of "security" under the Bankruptcy Act. The effect of an assignment is similar to that of a transfer of ownership, and is subject to revocation under the preference provisions of the Bankruptcy Act.

Thai law is silent on the admissibility in evidence and enforceability of a document signed in counterparts. The validity of obligations to reimburse legal fees in the event of a court case in Thailand is uncertain.

Conditions of admissibility of documents into evidence is that stamp duty has been properly affixed and that Thai translations be provided for documents in a foreign language. The purchase of foreign exchange is subject to approvals of authorised agents of the Bank of Thailand.

Generally, the charging of interest on interest is prohibited except where the lender and borrower have agreed that interest due for not less than one year will be added to the capital and the whole will bear interest.

Certain documents must be executed in the Thai language, such as mortgages. The consent of the BOI is required to mortgage machinery which was imported under duty exemption or reduction, and land which has been acquired by a majority foreign-owned promoted company with BOI consent.

The assets of state enterprises are immune from execution in Thailand. Thai law is silent on the legal effect of a submission to the non-exclusive jurisdiction of foreign courts, waivers of objections to venue, and judgement currency indemnities.

The appointment of an agent may be revoked. The ceiling on interest on foreign loans is 20% per year.

A choice of foreign law will be recognised, but only to the extent to which the law chosen is proved to the satisfaction of the court, and is not contrary to the public order or good morals of the people of Thailand. A judgment of a foreign court is not enforceable in Thailand, but is admissible in evidence in legal proceedings in Thailand. A foreign arbitration award is enforceable, subject to defences in under the Arbitration Act (2002).

A money debt expressed in a foreign currency may be paid in Baht. The enforceability of pledges of bank accounts, and judgment currency indemnities, are uncertain.

Thai courts have power to award legal fees and costs in their discretion, subject to ceilings in the Civil Procedure Code. The enforceability of covenants to reimburse legal fees is uncertain. The Act on Unfair Contract Terms give Thai courts broad authority to invalidate unreasonable contractual provisions under certain circumstances.

Finally, the use of arbitration in contracts including finance documents with state companies must be approved by the Cabinet.

The security available under Thai law and documentation associated with project financing have become well-understood by large foreign lenders to Thai projects. Nevertheless, it is strongly recommended that term sheets 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.

Albert Chandler
  Chandler & Thong-ek Law Offices

Albert Chandler is the founder of Chandler & Thong-ek Law Offices, which was established in 1974. He has been practicing business law in Bangkok, Thailand since 1969, specialising in business law, energy law, international transactions, project financing and investment projects. Chandler's energy sector experience includes advice to eight gas-fired power projects in Thailand, six Lao PDR hydroelectric power project financings, and five coal-fired power projects in Thailand. He represented PTT and its subsidiaries on the Trans Thailand-Malaysia Pipeline Project.

He also acted as mineral law and policy adviser to the Government of Nepal under the World Bank (1982-2007), under UNDP to the Philippines on mining legislation (1988-1990), and to Vietnam on petroleum legislation (1989-1990). He has been a special lecturer at the Faculty of Law, Chulalongkorn University, since 1987. In 2010 Chandler introduced the first Chula LLM oil & gas law training courses attended by government and private sector representatives.

In 1995, he co-founded the law practice Myanmar Legal Services. He holds a BS degree in mining engineering from University of California at Berkeley, and LLB from Harvard Law School.