Lenders turn away from Laos

The Lao People’s Democratic Republic’s central bank received a lukewarm response to its four-year US$50 million offshore loan, despite a hefty price offer, as lenders showed reluctance to expose themselves to the heavily indebted country from Southeast Asia.

Only six banks joined the Bank of Laos RDP‘s loan in general syndication after a handful of existing lenders refused to participate, opting instead to reduce their exposure as the government grapples with a possible debt crisis.

The Lao ruler has an average of $1.16 billion in debt maturities due each year through 2025, Fitch said, and its economy has been ravaged by the pandemic. His credit rating was downgraded to Triple C in 2020 and remains under pressure.

“We have become more cautious in lending to Lao borrowers since the sovereign’s credit rating downgrades in 2020,” said a Taiwanese banker whose firm dropped the last loan. “We have renewed our limits by country based on the downgrades, as we are concerned about the risk of indebtedness in the country.”

Last August, Fitch warned of pressures on external liquidity resulting from large medium-term sovereign debt maturities combined with its modest foreign exchange reserves and limited external funding options.

Laos obtained its first international ratings in early 2020, when it was rated B3/B– (Moody’s/Fitch). However, Moody’s and Fitch lowered sovereign ratings to Caa2 and CCC in August and September of the same year, respectively, in response to escalating public debt, falling foreign exchange reserves and concerns that the country could default on its debts.

“Such ratings make it more difficult for Laos to raise new funds on the international market to pay off maturing debt, and we fear that much of this debt could be a ticking time bomb, which could trigger a serious crisis for developing countries already grappling with the impact of the Covid-19 pandemic,” said a second banker.

Cathay United Bank was appointed as lead arranger for the last loan, and a Thai bank and five Taiwanese banks joined: Bank of Bangkok, First commercial bank, Hua Nan Bank, sunny bank, Taichung Commercial Bank and Taiwan Cooperative Bank.

The answer is a far cry from Bank of Lao PDR’s previous four-year US$116.5 million loan secured in March 2019. a 435 basis point Libor margin and closed with 14 more joining. lenders.

The price of the last loan was significantly higher, offering a high-level all-in of 505bp via a 495bp margin on Libor and an average life of 3.4 years.

The lenders reproached the borrower for having mandated a bank to carry out at the same time another loan, the launch of which was delayed. Market participants said the borrower failed to pay attention to free market covenants when issuing the two loans, reflecting its lack of experience in international fundraising.

The borrower has the form. The $116.5 million loan signed in March 2019 was launched in December 2018 – at the same time that another two-year $100 million facility was also launched through Taipei Fubon Commercial Bank. This deal was revived in April 2019 due to a lack of cash.

“Clearly, the borrower was keen to expand its pool of international investors. But we didn’t see a lot of transparency there,” said a second Taiwan-based loan banker.

The Laotian sovereign has missed other attempts to raise international funds. In March last year, the Lao People’s Democratic Republic failed in its third attempt to sell offshore bonds in as many months, despite a double-digit return.

Dependence on China

Lenders who opted to back the latest central bank loan were reassured by the landlocked nation’s deep ties to China and the prospects for its economy after the opening of the Laos-China railway.

Fitch said China remains a key source of bilateral financing and possible debt relief, as about half of Laos’ external debt repayments in the coming years are due to China.

The People’s Bank of China extended a renminbi swap line with the Bank of Lao PDR in mid-2020, which helped boost foreign exchange reserves. Additional support could be provided and would be essential for external funding prospects.

Dependence on China has also led to rising debts. In March last year, Laos ceded majority control of the heavily indebted utility Electricité du Laos to state-owned China Southern Power Grid to cover its debts.

“We’re not too worried about Laos’ debt crisis because we think they might try to find a solution with China, which requires less financial transparency than other external financing options,” said one. third lending bank.

In December, China and Laos inaugurated a high-speed rail linking the southern province of Yunnan and the Lao capital Vientiane, as part of a major Belt and Road Initiative project in the region. The Export-Import Bank of China provided a loan of about $3.6 billion which accounts for the bulk of the railway’s total cost of $5.97 billion.

“We expect the new railway can boost Laos’ economy by boosting its tourism and trade with China,” the third lending banker said.

The Lao economy is also on track for improved growth in 2021, although it is still below pre-pandemic levels. Last August, the World Bank predicted that GDP growth would increase to 3.6% in 2021, from 0.5% in 2020.

Passed on story: clarifies the loan syndicate

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