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Laos Plans First Overseas Bonds to Fund Power Plants

Dodgy deals
, May 19 2010

Laos, Southeast Asia’s smallest economy, plans to sell its first foreign-currency bonds to finance electricity projects as part of efforts to become less dependent on international aid.

The communist-run nation may sell as much as 2.5 billion Thai baht ($72.5 million) of five- to 15-year notes backed by royalties from hydropower plants, said Chiemi-Jamie Kaneko, a financial markets official at the Asian Development Bank, which is advising the Laos government.

“The world has a view that we are closed, but actually we are open,” Boualith Khounsy, a director at the Laos Ministry of Finance’s fiscal policy department, said in an interview in Bangkok. “We have to find a way to mobilize funds and strengthen our system.”

Landlocked Laos is seeking global investors to help it pay for new infrastructure projects and create jobs for its 7 million citizens, nearly half of whom are younger than 16. It plans to open a stock exchange by October 2010 and join the World Trade Organization two years later, reducing dependency on borrowing from international organizations and donors.

Proceeds from the bonds will be used to buy a stake in a hydropower project to provide electricity to Thailand, Boualith said. Laos officials are in talks with state-owned Export-Import Bank of Thailand to guarantee the notes, according to Kaneko.

The sale will “ideally” happen “later this year, or January, February,” Kaneko said. It may be split into two, with the second part coming to market in two or three years, she said.

Timing, Size
“Everyone is trying to tap into the primary issuance market,” said Pongtharin Sapayanon, who helps oversee $619 million at Aberdeen Asset Management in Bangkok. “These type of securitizations wouldn’t be something that come to market very often,” he said, adding he may buy the Laos bonds.

Bank of South Pacific, Papua New Guinea’s largest bank, last week said it plans to raise as much as 200 million kina ($73 million) in that country’s first bond sale. The resource- rich nation north of Australia had gross domestic product of about $6.36 billion last year compared with Laos’s $5.19 billion, according to the Central Intelligence Agency’s World Factbook.

“Given the economic and market situation right now, we will have to consider the timing and the size of the sale carefully,” Souligna Souphitrak, a deputy director in the Laos fiscal policy department, said in a telephone interview from the capital, Vientiane.

‘Successful Deal’
Standard Chartered Plc, HSBC Holdings Plc, TMB Bank Pcl and Siam Commercial Bank Pcl bid to manage the sale last week and Laos officials will make a recommendation to Prime Minister Bouasone Bouphavanh in early June, Boualith said.

“It has all the features of a successful deal,” said Warren Lee, Hong Kong-based head of asset-backed securitization in Asia for Standard Chartered. “You’re doing this to help start up the market.”

Laos aims to sell kip-denominated bonds by 2010, according to Lai Quang Thuc, Hanoi-based president of the Vietnam-Lao- Cambodia Association for Economic Cooperation Development, who in 2006 aided Laos in drawing up a five-year economic plan.

Laos has only sold bills maturing in one year or less, according to Boualith. It received about $433 million in overseas development assistance in 2007, equal to more than half its annual spending, according to the most recent data available from the Manila-based ADB.

Mining, Hydropower
The amount of debt Laos owes the ADB and World Bank “is a constraint for our economy,” Boualith said.

Copper and gold mining, hydropower and tourism are the biggest sources of income in a country where most people survive on subsistence farming. The ADB forecasts gross domestic product will increase 5.5 percent this year, the most in Southeast Asia, where the global slowdown has curtailed growth in export- dependent countries including Singapore, Thailand and Malaysia.

“Laos needs massive financing for their future projects,” the ADB’s Kaneko said. The bank expects Laos to include the proceeds from the bonds in its budget for the fiscal year starting October, she said.

The Theun-Hinboun and Houay Ho hydropower projects in southern Laos that will be used to back the bonds provide 340 megawatts of electricity to Thailand each year. Laos has agreed in principle to provide Thailand with 7,000 megawatts by 2015, and has four hydropower plants under construction at a total cost of $4 billion with capacity of about 3,000 megawatts.

Laos’s baht notes are a “pilot project” to use bond financing for regional infrastructure projects, according to Kaneko. “If we successfully do one deal then others will come,” she said.


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