Seven aspects of Thai cross-border financing
Cross-border financing of Thai and cross-border infrastructure and energy projects
Thailand’s power plants, transmission lines, and energy grids, as well as roads, railway lines, airports, and seaports, are increasingly developed and operated by public-private partnerships. Typically, this involves foreign companies and investors. An important part of the PPP is the financing of the project from abroad.
Cross-border assets, like pipelines, operate between different legal and regulatory regimes and have to meet more stringent requirements to be bankable, instead of a scenario with a single overarching legal regime. This results, above all, from the long time-frame from inception to the point at which the end product can be utilized and exploited.
Seven key requirements of the lender
#1. Project finance: From a general viewpoint, the financing of cross-border energy and infrastructure projects can be done by equity and shareholder loans, corporate finance or with mostly project finance elements. Corporate financing from commercial banks, export credit agencies and/or multilateral financial institutions will be deemed suitable only where the company has an operating history and there are existing cash flows.
The debt capacity of project financing depends on the projected cash flows from the asset. Mixed structures are possible and customary in Thailand. Sovereign-backed financing will in most cases not be available. Infrastructure funds are not unusual ingredients in the overall financing structure.
Another option is funding from the Asian Infrastructure Investment Bank (AIIB) or other multilateral development banks. This includes investment activities by participating in direct loans, making equity investments and guarantees, and undertaking other forms of investment activities.
#2. Stable legal regime: Thailand has a pretty pure civil law system with the Civil & Commercial Code as the legal basis for commercial contracts. Generally, contracts under foreign laws can be agreed, including foreign arbitration courts. Certain limitations apply in agreements with governmental agencies and government-owned companies.
Under Section 44 of the Interim Constitution, martial law is still effective in Thailand. It allows overruling existing civil laws, contractual arrangements with the government, governmental agencies and government-owned companies, as well as the granting and termination of licenses and approvals. The legal and factual consequences are plentiful.
Thailand’s legislation distinguishes in several areas between the effectiveness and enforceability of contracts. This has a great impact on financing consideration and the bankability of Investment projects.
#3. Robust contractual framework: The long-term financing requires even longer long-term agreements with a suitable tariff structure, especially the power purchase agreement, transportation agreement, and the overall supply chain, depending on the asset type. This can be availability-based, performance-based, or else. Additional agreements are EPC Contracts and O&M Agreements.
For cross-border assets, an intergovernmental agreement or host government agreement facilitates the financing. Also, the lender has to focus on the insurance policies in place. Depending on the lender, loans might have to include specific remedies, external debt reporting, and adherence to the general conditions as stipulated by the lender.
#4. Environmental and social compliance: Thailand’s legislation on environmental impact and social matters has been increased during the last years. However, it does not reach European standards.
Financing through a European or U.S. bank, especially government-related institutions, might require additional compliance due diligence apart from the legality under Thai legislation. Standards set by the International Monetary Fund and the World Bank might be utilized as a general policy.
Practical importance has the EIA Environment Impact Assessment which is required by law if certain thresholds in type and scope of building, facility or venture are met. Typically, the EIA requires a public hearing which gives a level of uncertainty in the approval process and timeline.
#5. Bankable counterparties: Parties and counterparties involved have a certain degree of reputation, credibility and experience. These three aspects can’t be compensated and have to be examined separately. Internationally proven evaluation schemes on counterparty reliability and performance allow a solid evaluation of this aspects.
Thailand’s government is highly decentralized. Governmental agencies and local authorities act independently and with a broad scope of discretionary leeway. The national laws are interpreted and applied differently in different provinces.
The counterparty analysis has implications on additional agreements, an advanced security package and, as the case may be, further improvements on the risk management regarding particular elements. The higher the deficits, the more countermeasures have to be implemented as compensation.
#6. Commercial and legal risk allocation: In a complex financial environment, the risk inventory is the starting point for the risk evaluation and an effective risk steering to avoid a crisis management. The risk policy has to be specified and predefined by the financial institution. To identify risk owner and risk manager enables an early warning system.
Completion risk, supply risk (insufficient supply or inadequate infrastructure), operation risk, and market risk are the main categories. Political risks can be reduced through Thailand’s huge number of Bilateral Investment Treaties (BIT).
#7. Security package: On an international level, lenders will require a strong security package, including security over key assets, assignment of the key project agreements, the pledge of shares in the project company and the assignment of rights under insurance policies. Having recourse to additional revenue streams or specific (completion) guarantees of the sponsor facilitates the lending decision. It has to be carefully examined on a case-by-case basis which other securities Thai law permits.
Legal services from Bangkok
PUGNATORIUS Ltd. is a Bangkok-headquartered specialist provider of bespoke transactional legal and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property developments and acquisitions. Regarding the cross-border financing of energy and infrastructure projects, the law firm offers, above all, the design and negotiation of finance agreements.
The law firm offers due diligence and legal opinions on these aspects:
#1. Authority Opinion: Does the borrower have under Thai laws the legal authority to enter into and perform its obligations under the loan documents?
#2. Enforceability Opinion: Are the loan documents in Thailand judicially enforceable against the borrower?
#3. Violations Opinion: Will the execution and performance of the loan documents violate any agreements of the borrower, or any judicial or regulatory orders, to which the borrower is subject, or any applicable laws or regulations?
#4. Litigation Opinion: Is there any material litigation pending or threatened against the borrower in Thailand?