The 717MW Phu My 3 combined cycle gas turbine (CCGT) project ? Vietnam's follow-up to its first power BOT Phu My 2.2 ? signed on June 12. Outstanding direct agreements with the Vietnamese government, notably a Vietnamese Dong convertibility guarantee and legal opinion from the Ministry of Justice, are ongoing as of mid-July but expected to be finalised in days.

The project has changed radically since first being sponsored in 1997 by BP/ Statoil, BHP, Tomen and Agrium, as a combined fertiliser and power plant. All sponsors other than BP had dropped out by 2000. BP continued with the power element of the deal on its own, partially selling down to current co-sponsors Sembcorp (33.3%) and Nisho Iwai and Kyushu Electric (33.3% combined) in 2001.

The project has been as much about offtaking gas from BP's share in the $1.3 billion Nam Con Son gas project (co-sponsored by BP, PetroVietnam, ONGC Videsh, and ConocoPhillips) as providing state electricity provider EVN with power to meet Vietnam's burgeoning electricity demand.

Nam Con Son gas operations started in November 2002 and despite being the second BOT plant to finance, Phu My 3 will be fully operational six months ahead of EDF-sponsored Phu My 2.2 ? a symptom of BP's drive to get the plant built which also extended to the pricing being agreed after the arranging banks had been mandated.

Total project costs on Phu My 3 are $412 million, which break down into a 75:25 project debt/equity split. The $309 million debt comprises a $99 million direct loan from JBIC, a $40 million direct loan from Asian Development Bank (ADB) and $170 million in commercial tranches fully underwritten by the five lead arrangers: Bank of Tokyo-Mitsubishi (insurance); Credit Agricole (modelling); Credit Lyonnais (technical) Fortis (documentation and structuring) and Mizuho (structuring).

Each bank took $34 million of the facility, which features a final maturity of September 2016 and an average life estimated above eight years. Around $45-60 million of the deal will be syndicated to three or four banks (a decision on the fourth is still pending) despite interest from 14 institutions.

The $170 million commercial loans are divided into $33 million ADB and $43 million Multilateral Investment Guarantee Agency (MIGA) political risk guarantees, and a $94 million Nippon Export and Investment Insurance (NEXI) PRI tranche. Drawdown of 80% of all facilities is expected by mid-August.

Structurally the deal differs little from Phu My 2.2 (lead sponsored by EDF). Although tenor on Phu My 3 at 12.5 years is 3.5 years less than Phu My 2.2, Phu My 3 comes with no real construction period or risk: the plant is already near completion and EPC contractor Siemens is expected to have it fully operational from February 2004.

Margins, described as similar to 2.2, are a little higher on Phu My 3 if rumours that 2.2 went out at 100-150bp over libor are correct. Margin on Phu My 3 ranges from100-175bp over libor, on a step-up structure to a maximum of 200bp depending on the tranche. The first step up is one year after start of operations of full operations (March 2005) and the second in year six.

Despite the relative similarities there are some minor improvements on Phu My 2.2. The wording of the overall documentation is described as ?stronger?, particularly the government guarantees largely formulated by BP's in-house legal team and Milbank Tweed and local counsel from Phillips Fox. The willingness of the Vietnamese government to use recognised international law ? a combination of Singapore and UK law ? was also significant in giving lenders, counselled by Freshfields, added comfort.

Furthermore, Phu My 3 required the development of a complete intercreditor document template for its multilateral and ECA support from JBIC, ADB, MIGA and NEXI. Phu My 3 is the first deal in which all four institutions have participated and the different lending policies and aims of each institution made for complex negotiations.

All risk on the deal, other than political, is negligible or offset by the structuring. EVN is the offtaker under a 25-year take-or-pay power purchase agreement guaranteed by the Vietnamese government. And irrespective of the guarantee, EVN will need the supply to keep up with rocketing Vietnamese demand (14% annual average growth in the last 10 years) for more electricity.

Similarly, plant fuel supply is assured. Gas reserves in the Lan Tay and Lan Do gas fields in Block 06.1 in Nam Con Son, which will supply Phu My 3, are estimated at 20 years.

The deal also comes with both interest rate hedging (a swap that allows for a fixed interest rate), and a strong dollar-dong convertibility mechanism. Dollar-based tariff rates have been agreed and EVN is charged once a month at the dong equivalent. EVN payments are made in dong to government guaranteed Vietcombank, which in turn pays the project company in dollars.

Political risk on the deal is equally well covered ? up to 97.5% by NEXI. Furthermore, ADB has, for the first time, extended its guarantee without a counter-guarantee from the Vietnamese government. And MIGA, also for the first time, is providing political risk insurance on the interest rate hedging.

The equity profile on Phu My 3 is as significant as the structuring. Kyushu Electric, with substantial maintenance contracts on the plant and its combined 33% stake with Nisho Iwai, is not following the typical 10% take Japanese passive investment strategy. Similarly, Sembcorp's participation is a signal that Singapore Inc may be about to start an investment drive beyond its borders.

Further BOT deals in Vietnam's power programme are politically unlikely in the short term. EVN commissioned Phu My 1 and 2.1 in 2000, and is currently developing Phu My 4 and 5. However, the government and EVN are sending out mixed messages ? restricting private sector power to 10-15% of the market whilst stating they do not have the funding to keep up with domestic demand for more generation.

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Phu My 3 BOT Power Co

Status: Underwritten 12 June 2003

Description: Project financing for 717MW CCGT plant development in Vietnam

Sponsors: BP; Sembcorp; Nisho Iwai/Kyushu Electric

Total project cost: $412 million

Project debt: $309 million

Multilateral support:
ADB; JBIC; NEXI; MIGA EPC contractor: Siemens

Lead arrangers: BoTM; Credit Agricole; Credit Lyonnais; Fortis; Mizuho

Sponsor counsel:
Milbank Tweed Hadley and McCloy (international); Phillips Fox (Vietnam)

Lender counsel:
Freshfields Bruckhaus DeringerEPC counsel: Baker & McKenzie