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Rating Action:

Moody's assigns first-time (P)Ba3 to Mong Duong Finance Holdings BV's USD senior notes

18 Jul 2019

Hong Kong, July 18, 2019 -- Moody's Investors Service has assigned a provisional (P)Ba3 rating to the proposed senior secured USD notes of Mong Duong Finance Holdings BV due 2029.

This is the first-time that Moody's has assigned a rating to Mong Duong Finance.

The outlook on the rating is stable.

The provisional status of the rating will be removed upon completion of the transaction under satisfactory terms.

Mong Duong Finance is a finance entity created by the shareholders of AES-VCM Mong Duong Power Company Limited (MDP), which owns and operates coal-fired power plants. In tandem with the notes, Mong Duong Finance will also raise a four-year amortizing bank loan facility.

Mong Duong Finance will use the proceeds from the USD notes and the bank loan facility to purchase MDP's project loan from the existing lenders. Post this proposed transaction, Mong Duong Finance will be a major lender to MDP.

MDP is the largest private sector power project in Vietnam, with a capacity of 1,120 megawatts of two sub-critical coal-fired power plants. It operates under a long-term power purchase agreement (PPA), selling electricity to Vietnam Electricity, and under a coal supply agreement with the Vietnam National Coal-Mineral Industries Group (Vinacomin).

MDP benefits from the Government of Vietnam's (Ba3 stable) guarantee on the performance of all payment obligations and all financial commitments of Vietnam Electricity and Vinacomin, and the government's compensation for MDP's operational difficulties stemming from a failure of coal supply by Vinacomin, under Government Guarantee and Undertaking Agreement (GGU) and the Build Operate Transfer (BOT) contract.

The holders of the USD notes will be supported by several structural features which establish a close linkage between the credit profiles of MDP and Mong Duong Finance.

Such features encompass (1) Mong Duong Finance's status as the major lender of MDP's existing project loan, with a matching repayment structure between the proposed notes and MDP's project loan; (2) MDP's undertaking to indemnify Mong Duong Finance's costs associated with administration, letter of credit-based debt service reserves and other operating costs; (3) a trustee-managed cash flow waterfall; (4) collateral package; and (5) covenants with certain carve outs.

Because of these features, the rating of Mong Duong Finance is closely linked to MDP's credit profile.

RATINGS RATIONALE

"The (P)Ba3 rating of the notes primarily reflects MDP's cash flow visibility, stemming from the fully contracted cash flow under the long-term PPA and from strong support from the Vietnamese government, and its solid debt service coverage metrics," says Mic Kang, a Moody's Vice President and Senior Credit Officer.

MDP has a robust tariff structure that helps in the recovery of capital costs and pass through of foreign exchange and fuel costs. In addition, more than half of the company's revenue is derived from a stable and predictable capacity charge, which represents a core cash source for operating costs and debt repayment.

"The government's strong support is an important factor in driving MDP's predictable operating cash flow, because it guarantees Vietnam Electricity's performance of its payments and financial commitments under the PPA, and its commitment mitigates MDP's exposure to fuel supply risk," adds Kang.

The (P)Ba3 rating also recognizes MDP's solid debt service coverage metrics, which provide credit support.

The rating also reflects Moody's expectation of the major sponsors' — AES Corporation (Ba1 stable) and POSCO Energy, a subsidiary of POSCO (Baa1 stable) — strong commitment and expertise, which will likely continue to support MDP's operating performance.

Moody's believes AES Corporation and POSCO Energy will continue to support MDP's operations, because the sponsors are long-term investors in the Vietnamese power sector, with extensive experience.

The (P)Ba3 rating of the notes is constrained by 1) MDP's concentration in a single offtaker and a single coal supplier; (2) MDP's short track record of above four-year operations; and (3) Vietnam's sovereign rating of Ba3 stable.

Any material disruptions at Vietnam Electricity or Vinacomin, or both, will have a meaningful impact on MDP's operations, given MDP's full reliance on Vietnam Electricity for power sales and on Vinacomin for coal supply. Nevertheless, this risk of concentration in a single off-taker and a single coal supplier is mitigated by the government's strong support through the GGU and the BOT contract.

MDP has been performing well since commissioning, and the company has implemented enhancements in the past year to improve its heat rate, which was high until 2018. The maintenance of an improved heat rate is key, given its impact on MDP' operational performance and cash flow.

Moody's expects that MDP will achieve an average debt service coverage ratio of between 1.4x and 1.5x over the next few years. This result supports the (P)Ba3 rating of the notes.

Mong Duong Finance has in place a debt service reserve facility equivalent to six months of debt service. However, such an instrument has weaker features than cash-funded debt service reserves.

Nevertheless, the credit quality of the notes benefits from typical project finance structural features and collateral package, including the share pledge by Mong Duong Finance and its accounts under the notes, and share pledge by MDP, substantially all of MDP's assets, project agreements, MDP's accounts and insurance and reinsurance proceeds. MDP has no refinancing risk, given the fully amortizing notes.

The stable rating outlook reflects Moody's expectation that the Vietnamese government's strong commitment to MDP, mainly through the GGU and the BOT contract, will remain intact, and that MDP's performance will unlikely experience a material change over the next 12-18 months when compared with Moody's base-case projections.

Upward momentum in the rating is unlikely in the absence of an upgrade of Vietnam's sovereign rating. Consequently, the rating could be upgraded if (1) Vietnam's sovereign rating is upgraded; and (2) MDP maintains its solid operations and financial leverage within Moody's base case expectations.

The rating could come under downward pressure if (1) Vietnam's sovereign rating is downgraded, (2) the government's support of the company weakens, because of changes in regulations and in the absence of compensation, and/or (3) MDP's debt service coverage ratio falls materially to below 1.1x during the amortization period. Moody's does not see such a scenario as likely.

Moody's considers MDP's exposure to environmental, social and governance risk as moderate. MDP's plants are coal fired, and therefore have a high intrinsic exposure to carbon transition risks.

But such exposure is mitigated by the government's compensation for most incremental costs against unfavorable changes in the law — including environmental laws and regulations — through direct payments or adjustments of the tariff structure under the BOT contract. The sponsors' strong commitment to the company provides additional comfort in MDP's ability to manage carbon transition risk.

The principal methodology used in this rating was Power Generation Projects published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AES-VCM Mong Duong Power Company Limited (MDP) is a limited liability joint venture, which owns and operates two sub-critical coal fired power plants with a total capacity of 1,120 megawatts. The plants are located around 220 kilometers east of Hanoi (50 km north-east of Ha Long City in Quang Ninh Province).

MDP is owned by AES Mong Duong Holdings B.V. (51%) — a subsidiary of AES Corporation (Ba1 stable) — PSC Energy Global Co., Ltd (30%) — a subsidiary of POSCO Energy, and which is in turn owned by POSCO (Baa1 stable) — and Stable Investment Corporation (19%), which is owned by China Investment Corporation, a sovereign wealth fund of the Government of China (A1 stable).

Mong Duong Finance Holdings BV is the issuer of the proposed USD notes. Initially, the entity is indirectly owned by AES Corporation and China Investment Corporation. It will be owned by the same shareholders as MDP and in the same proportional shareholding, if POSCO Energy becomes a shareholder of Mong Duong Finance Holdings BV.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Mic Kang
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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