Asia’s debt markets reached another milestone in 2019 with the first international bond from a frontier market project.
AES-VCM Mong Duong Power (MDP), which operates the 1,120-megawatt coal-fired Mong Duong 2 plant in northern Vietnam, sold US$678.5m 9.8-year senior secured bonds through Mong Duong Finance Holdings. The bond amortises from the end of the fourth year and has a weighted average life of 6.9 years.
Alongside a US$485m syndicated loan, the deal refinanced MDP’s existing project debt at an attractive fixed coupon, improving returns for the sponsors and giving capital markets investors a rare chance to take exposure to Asian infrastructure.
There are relatively few project bonds in Asia, and there had been very little offshore supply from Vietnam to provide pricing benchmarks, with no sovereign issuance for the past five years. That meant a careful price discovery process was needed.
Pricing tightened from initial guidance of 5.625% area to final guidance of 5.25% area, plus or minus 12.5bp, before printing at 5.125%.
Even with that 50bp tightening, final orders were over US$2.75bn. The 144A/Reg S bond won over a diverse investor base, with the US taking 32% of the deal.
The project’s strong sponsor base undoubtedly helped win over investors. US power company AES ultimately owns 51% of MDP, South Korea’s Posco Energy 30% and sovereign wealth fund China Investment Corp 19%.
Still, as the first deal of its type from Vietnam, the issuer and bookrunners needed to convince investors of the strength of the guarantees and contracts associated with the bond.
MDP has a government guarantee on all payment obligations under a build-operate-transfer scheme, with the plant set to be transferred to the government after 25 years of operation. Its 25-year power purchase agreement with state-owned Vietnam Electricity runs until 2040, and state-owned miner Vinacomin has committed to supply coal to MDP at a regulated price for the life of the project.
To keep these protections in place and avoid lengthy renegotiations, proceeds from the bond and the new loan were used to buy MDP’s project loan from the existing lenders, rather than refinancing the existing loan.
There is a pledge of shares in MDF and security over its assets, but MDP itself does not guarantee the bond, as Vietnam places limits on the total dollar amount of debt that can be issued from the country.
Thanks to these structural features, the bonds earned ratings of Ba3/BB (Moody’s/Fitch), in line with the sovereign. Investors left satisfied, as the gained as much as half a point the following day, finishing IFR’s review period at 101.35.
Citigroup and HSBC led the refinancing as joint global coordinators on the bond and original mandated lead arrangers and bookrunners on the loan. SMBC and Standard Chartered were joint bookrunners and MLABs.