Monday, November 17, 2008

Thailand's Japanese money men

The Finance Lawyer

Project financing by JBIC

WIROT POONSUWAN

The Japan Bank for International Co-operation (JBIC) has played a pivotal role in funding the construction of transport projects in Thailand through government-to-government soft loans. Yet little is known about its project financing arm, which can provide co-financing with Thai banks to major projects such as independent power production projects or oil and gas projects on a semi-commercial basis as an export credit agency, or ECA. Performing its financier role as an ECA, JBIC offers financing to Thai companies to purchase machinery and services from Japanese suppliers, a term labelled "buyer's credit."

JBIC or JICA? Recently there has been confusion as to whether JBIC is still around or whether it merged with another Japanese governmental organisation, Japan International Co-operation Agency, JICA. The government-to-government part of JBIC has ceased to exist and is now part of JICA, but the commercial project financing arm of JBIC continues.

To understand the role of the new JBIC better, its purposes and operations are similar to the Export-Import Bank of Thailand (Exim): JBIC promotes the export of Japanese machinery and services in the same way that the Thai Exim Bank aids exports of Thai goods and services. JICA and JBIC have separate offices in Bangkok: JICA on Sukhumvit Road and JBIC Ratchadamri Road.

The rarity of JBIC's project financing activities in Thailand over the past few years means that its private unit has had a lower profile. It concentrates on lending directly to Thai commercial banks as a funding source for a variety of their banking activities, though the organisation is still open to be engaged in project financing as before.

Thai bank guarantee facility: Under a JBIC buyer's credit, JBIC lends to the project company and needs local banks to guarantee the loan. The guarantee is a vehicle for JBIC to secure co-operation from Thai banks as its policy is not to compete with local banks but co-operate with them.

A JBIC loan is invariably large in size; no single Thai bank would want to carry the risk alone. A major Thai bank will act as arranger and seek participation from other Thai banks to share the risk. When the arrangement is set, an agreement called a banking guarantee facility agreement will be signed between the project company and all the Thai banks involved, under which the arranger acts in a second role as facility agent and all the other Thai banks join in as issuing banks who separately issue guarantees to JBIC. The guarantees issued are a credit facility, contrasted with a typical guarantee as security against the project company's default.

JBIC loan repayments: No matter if it is a G-to-G loan or private sector loan, one unique aspect of JBIC loans is that they always contain a fixed equal amount of principal to be repaid on a very predictable amortisation schedule or a loan repayment schedule. The semi-annual repayment dates are simplified - falling exactly on both Jan 1 and July 1 of every calendar year - along with loan interest payment dates.

Complemented by the Thai banks' guarantee facility agreement, the issuing Thai banks will pay the principal to JBIC in US dollars on behalf of the project company on each of the JBIC loan repayment dates. These US dollar payments are converted into Thai baht loans owed by the project company to the issuing Thai banks as new lenders.

Interest on the JBIC loans will not be paid by the issuing Thai banks; the project company will have to take responsibility of this obligation. The process of the issuing Thai banks paying JBIC repeats itself until the entire JBIC loan is fully repaid and JBIC is no longer a creditor; the guarantees issued by the Thai banks will finally be superseded by the baht loans and then the project company only deals with Thai lenders. The Thai banks' loans will have an amortisation schedule and interest payment dates of their own, ending a few years after the JBIC loan was paid off.

Advantages of co-financing: These institutions co-operate because JBIC has no risk as Thai banks pay on behalf of the project company while local banks get business and fee income from the guarantees they issued and interest income on the baht loans substituting for their dollar guarantees. The project company itself gets a lower financing cost than a purely commercial loan with no JBIC collaboration.

Wirot Poonsuwan is a former chairman and managing partner of Clifford Chance Wirot as well as a former partner of Baker & McKenzie in Bangkok. He now has his own firm, Poon & Poon, Attorneys at Law. He can be reached at wirotp@poonandpoon.com

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