Sunday, 17 February 2019

MD2 IPP breaks new ground

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The Mong Duong 2 IPP has moved into its construction phase. By Ian Fox, managing director, AES-VCM Mong Duong Power Co Ltd, and John Haberl, senior project manager, AES Corporation; Gilles Pascual, project finance head of power and renewables Asia, and Simon Gaudin, associate director, HSBC.

This article was first published in the PFI Yearbook 2012

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This past September marked an important milestone for Vietnam as the Mong Duong 2 (MD2) power plant moved forward with construction. Once operational, the plant will provide the country with a reliable source of electricity that will help support its growing economy and alleviate the acute power shortages that have been experienced throughout the country.

MD2 is a 1,200MW power plant with two identical coal-fired units and is located in Quang Ninh Province. The project is sponsored by AES Corporation (AES) of the US, which indirectly owns 51% of the shares in the project company and borrower, AES-VCM Mong Duong Power Company Ltd. Posco Power Corporation of South Korea indirectly owns 30%, and China Investment Corporation (CIC) of China indirectly owns the remaining 19%.

It is Vietnam’s largest private sector power project and AES is the first independent power producer (IPP) to reach financial close in the country since 2003. Twelve commercial banks and two South Korean export credit agencies participated in the financing.


AES is a global power company with generation and distribution businesses across five continents. Founded in 1981, AES built its first power plant in 1985, which was also one of the first competitive power plants in the US. In the early 1990s, as markets opened up globally, AES began generating electricity in the UK and then expanded to Argentina, Pakistan, China, Hungary and Brazil. Today, AES is one of the world’s largest power companies with a portfolio of 40GW in operation in 28 countries across five continents.

In 2005, electricity demand in Vietnam was forecast to grow by more than 15% pa until 2010. AES saw an opportunity to help meet this growing demand through a proposed 1,000MW coal-fired plant. As such, a memorandum of understanding was signed between AES and the Vietnam Government to develop the plant, which would become the largest US investment in Vietnam and the largest foreign investment in Vietnam’s power sector.

Shortly after the MoU was signed, AES, the anchor shareholder of the project with a 90% shareholding, partnered with state-owned Vietnam National Coal & Mineral Industries Group (Vinacomin) and started negotiating the concession agreements with the Vietnam Government.

At this time Vietnam’s reserve margin was close to 20%, an already worrying level that was in reality much lower during the dry season given the country’s reliance on hydroelectric power. Brown-outs were common and the urgent need for additional capacity in the grid was acutely felt. MD2 quickly became a priority project for the Vietnam Government.

By 2006, AES solicited indicative financing proposals from a range of banks and other financing institutions, a process to be repeated several times over the following five years as the project made progress. In 2008, the Vietnam Government decided to formally go ahead with the project – with an increased capacity of 1,200MW – and set an ambitious timeline for the IPP to materialise. The concession agreements were signed in Hanoi in April 2010. Celebrations were muted for AES – the magnitude of the task ahead to bring the project to successful financial close was still firmly at the forefront of the minds of everyone involved.

With an agreed, comprehensive and bankable contractual structure for the project, AES still needed to finalise its construction contracting strategy. The key question for AES executives around the world was to determine the origin of the EPC contractor: Chinese EPC or South Korean EPC, with all the consequences such a choice would have on the financing.

To speed up the process and assist AES in reaching a definitive conclusion, HSBC was hired as financial adviser to evaluate the feasibility of several financing plans depending on the origin of the EPC contractor. In addition, HSBC’s role was also to launch the financing RFP process.

The advantages for international sponsors of selecting a Chinese EPC solution over the more commonly chosen South Korean, Japanese or European contractors has been one of the hottest topics in the power sector over recent years. In particular, the deliverability of both the power plant itself (as contracted) and the associated debt financing ranks high on the list of concerns for sponsors looking to ring-fence execution risks and limit the level of recourse they would have to offer to lenders.

In the third quarter of 2010, following an intensive period of negotiation with prospective strategic partners and analysis of all contracting and financing options – a process led by managing director Ian Fox – consensus was finally reached on a South Korean solution that would feature substantial ECA support.

The commitment of Posco Power to partner with AES with an indirect 30% equity stake was important in the decision to then hire Doosan Heavy Industries & Construction (Doosan HIC) as the EPC Contractor. CIC, owner of a 15% stake in AES since 2009, also made the decision to invest part of its US$200bn war chest alongside AES and Posco Power as a financial investor with an indirect 19% stake in the Project. Vinacomin eventually exited the project.

The last pieces fell together and financing activities began in the second half of 2010 with one objective: to raise well over US$1bn of debt on competitive terms in financing markets still recovering from one of the worst financial crises of the past decades. Such loan financing was to be five times larger than the largest project financing ever raised in Vietnam.

AES approached potential lenders with a well-structured deal: South Korean export credit agencies (KECAs) Korean Trade Insurance Corporation (K-Sure) and Export-Import Bank of Korea (Kexim), with which parallel discussions were held during the EPC selection process, expressed strong support for the financing, which was quickly echoed by international commercial banks eager to be part of this high-profile financing.

The project structure

MD2 is located within the Mong Duong Power Centre, 220km east of the capital Hanoi and is being built alongside EVN’s 4x250 MW Mong Duong 1 power plant. The site was selected for its proximity to coal mines allocated to the Project by Vinacomin, easy connection to the national power transmission grid, good transportation infrastructure and access to cooling water.

The project contractual structure has been developed around the well-tested Vietnam build, operate and transfer (BOT) framework: it comprises a 25-year Power Purchase Agreement (PPA) with state-owned Electricity of Vietnam (EVN), a BOT contract with the Ministry of Industry and Trade (MOIT), a government guarantee and undertakings (GGU) with the Vietnam Government and a coal supply agreement (CSA) with Vinacomin, plus certain ancillary contracts such as the land lease and the water supply agreements.


The BOT contract between MOIT, the sponsors and the borrower sets the framework for the development and operation of the project over a 25-year concession period. It includes customary provisions in relation to the completion of the project (delay LDs, performance bonds, etc, but excluding performance LDs), force majeure, events of defaults (EODs), termination and lenders’ step-in rights; it also includes a preferential taxation regime applicable to MD2. The PPA provides that MD2 is to sell all its dependable capacity and its net electricity output to EVN for 25 years on a capacity-based tariff provided the project meets certain availability targets.

The EPC contracts were signed in January 2011 between the BOT company and Doosan HIC and its affiliates, provide for fixed-price, date-certain turnkey arrangements and feature performance guarantees and LDs provisions that reflect and exceed that of the concessions agreements. In addition, MD2 will contract its main ash pond under a separate onshore EPC contract.

The contractual structure as presented to the lenders in the financing RFP was conducive to a truly non-recourse project financing structure and AES was able to secure financing on this basis. Only a limited number of items were listed as “critical” in the numerous “key issues” documents that legal counsels prepared for the lender group. Such critical items required clarifications from various Government entities or specific structuring in the loan documentation and will provide the benchmark for the next IPP financings to come in Vietnam.

The financing

The loan signing took place in July 2011 in Hong Kong, meeting the target closing date set nine months earlier. First drawdown occurred early in September 2011, demonstrating that things can get done as quickly in Vietnam as anywhere else in the region.

The MD2 financing is unprecedented on many levels: it is the largest debt amount ever raised in Vietnam, the longest debt tenor ever achieved in the country, the first IPP financing in the country since 2003 and its first coal-fired international IPP. The transaction was also the largest non-recourse financing exercise undertaken by both AES and Posco Power and the first large-scale involvement of South Korean export credit agencies K-Sure and Kexim in the country. The financing amounts to US$1.461bn split into three loan facilities plus an ancillary facility to be used to issue performance bonds under the concession agreements.


The financing structure was developed with the specific intention of mitigating Vietnam political risks, given its BB– rating (S&P) and the large amount of debt being raised. The K-Sure insurance policy and the Kexim guarantee together provide for blended 85% political and commercial cover to the commercial lenders. Given the water-tight contractual structure, the presence of the KECAs, which already have significant financial exposure in Vietnam and therefore solid leverage with the Vietnam Government, and the commercial lenders’ strong appetite for power assets in the region – especially for contracted IPPs – lenders were able to accept 15% uncovered risk in Vietnam for 18 years, representing approximately US$170m of uncovered debt.

Overall, Kexim and K-Sure combine an 88.5% net loan exposure to the project while commercial lenders kept the balance 11.5%. Commercial lenders also accepted uncovered Vietnam exposure for the US$48m SDF and approximately US$1bn in US dollar interest rate swaps.


The MD2 financing stretched the debt tenor by two years over what was achieved on previous IPP financings in Vietnam, setting a benchmark 18-year door-to-door tenor. This follows the global IPP financing trend where 22-year tenors are common in the Middle East while 20 years is being achieved in Indonesia and Thailand. The financing has otherwise been conservatively structured with a gearing of 75:25, below the 80:20 debt:equity ratio allowed under the BOT contract, and the debt sizing DSCR at circa 1.4x ensures the project economics remain robust under a wide range of stress scenarios.


The sponsors are not providing any undertaking on cost overruns and a mechanism allows the borrower to use the cashflows generated by the first unit to pay for project cost and pre-fund the debt service reserve account (DSRA). The DSRA needs to be funded at an amount equivalent to the next debt service payment post-COD. The cash waterfall is otherwise customary for project financings of this nature, except for specific arrangements made for the funding of the ash pond capex and the cash-collateralisation of the uncovered SDF in case of drawdown under such facility.

The loan arranging process took place in two main phases. First, AES scored an exceptionally high hit ratio in late 2010 and early 2011 when the seven bookrunner MLAs (BMLAs) committed US$250m each, highlighting the acceptability of the financing and contractual structures. AES believed the oversubscription was necessary given the uncertainty in the financial markets. The BMLAs ran with the due diligence until a few weeks before loan signing. Second, a limited pre-closing syndication was successfully achieved, with five lenders joining the club at MLA and lead arranger levels.


The lenders’ due diligence was customary of such IPP financing with legal, technical, environmental, modelling and insurance reviews running in parallel to the BMLAs’ credit process and loan documentation. The BMLAs agreed to the mandate in the first quarter of 2011 and led a co-ordinated effort to manage separate paths of the due diligence process, allowing for an efficient financing timeline.

Credit Agricole CIB, as dcumentation bank, successfully led a diverse group of lenders to reach a consensus on financing documentation that was agreeable to the sponsors. BNP Paribas directed the approval process for the KECAs by ensuring all KECA diligence requests and documentation issues were handled as a top priority. SMBC and ING managed the insurance and model consultant, respectively to ensure these key diligence items were completed in a timely manner. In particular, environmental and technical due diligence directed by HSBC confirmed the lenders’ compliance with the Equator Principles as a result of their involvement in the financing with ERM categorising the project as “A”.

Construction started in August, a few weeks before first drawdown under the loan given the delay in obtaining SBV’s various approvals for the loan documents, and will take four years. Commercial operation date (COD) of the whole plant is targeted for June 2015.


The project, bringing almost US$2bn of FDI to Vietnam from 17 international fund providers over the coming four years, will help provide the country with a safe and reliable source of electricity to help support its growing economy. On the environmental and social front, MD2 will comply with Vietnam and World Bank standards and will also allow lenders to meet their requirements under the Equator Principles.

MD2 builds on AES’s track-record of successful operations in other South-East Asian markets, where the company is strategically positioned to pursue additional growth opportunities. AES has been developing projects in Asia since 1992 and today has nearly 7,000MW in operation in some of the region’s fastest growing markets.



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