China Eximbank provides $377 million buyer's credit loan for 500KV Salavan–Sekong II Electricity Transmission Line Project

Project narrative

On May 3, 2016, China Eximbank and the Ministry of Finance of Laos signed a $377 million buyer’s credit loan agreement for the 500KV Salavan–Sekong II Electricity Transmission Line Project. The loan’s estimated borrowing terms included a 18.1764-year maturity, a 5.05-year grace period, and a 3.1298% interest rate. The proceeds of the loan were to be used by the borrower to finance a commercial (EPC) contract (worth more than $400 million) between Électricité du Laos (EDL) — the state corporation of Laos that owns and operates the country's electricity generation, electricity transmission and electricity distribution assets — and China National Heavy Machinery Corporation (CHMC), which was signed on January 22, 2014. The project involved the construction of a 72 km, 500kV high voltage power transmission line from Salavan to Sekong, the construction of two 500kV transformer substations, the construction of control rooms, the installation of transmission towers, and the installation of safety systems. CHMC was the EPC contractor responsible for implementation. However, Pinggao Group Co., Ltd. (平高集团有限公司) — a subsidiary of the State Grid Corporation of China — was also involved in implementation (most likely as a subcontractor). According to a report published by the China Securities Regulatory Commission, the project commenced during the first half of 2018. The project was completed and the transmission lines and substations were put into operation on March 16, 2020. There are multiple indications that the China Eximbank loan for this project may have financially underperformed vis-a-vis the original expectations of the lender. In 2020, the Laotian authorities urgently sought debt relief from China Eximbank. At that time, the gross reserves of the Bank of Laos stood at only 1.5 months of import cover and credit rating agencies warned of a high default probability. In 2020, China Eximbank agreed to reprofile multiple loan agreements that it had previously signed with the Government of Laos (as captured via Record ID#96464). These debt service payment deferrals lasted for approximately 4 years (2020 and 2023) and provided approximately $1.892 billion of cash flow relief ($1.422 billion in deferred principal payments and $470 million in deferred interest payments). Deferred principal and interest repayments in 2020 were worth $202 million. Deferred principal and interest payments were worth $426 million in 2021. Deferred principal and interest payments were worth $594 million in 2022. Deferred principal and interest payments were worth $670 million in 2023. Additionally, according to a report published by the World Bank in April 2022, ‘[t]he energy sector, mostly represented by Électricité du Laos (EDL), accounted for over 30 percent of total PPG debt in 2021. […] EDL’s debt service obligations [were] still unsustainable [at the time], with future debt service accounting for about two fifths of EDL’s total operating revenue.’ In September 2020, a Chinese state-owned enterprise purchased a major public infrastructure asset in Laos—a large part of the country’s electricity transmission grid—from EDL as part of an apparent debt-for-equity swap. China Southern Power Grid Co. and EDL established a joint venture known as Électricité du Laos Transmission Company Limited (EDLT). China Southern Power Grid Co. purchased a 90% ownership stake in EDLT in exchange for a $600 million fee (equity infusion). Then, in March 2021, EDLT signed a 25-year concession agreement, which made it responsible for management of the country’s high-voltage transmission network above 230 kilovolts. Independent observers suggested at the time that EDL would likely use the $600 million upfront payment from China Southern Power Grid Co. to service its outstanding debts to Chinese creditors, although this has not been independently confirmed.