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Overseas borrowings (together with loans from overseas lenders and bonds issued internationally in foreign currency echange) by native companies are primarily monitored by the State Financial institution of Vietnam (the “SBV”) below Round No. 12/2014/TT-NHNN (SBV, March 31, 2014), which took impact on Might 15, 2014, as amended in 2017 (“Round 12”). Presently, medium- and long-term loans (i.e., loans with a tenor of greater than 12 months) are required to be registered with the SBV earlier than drawdown. Bonds which have a time period of greater than 12 months (which is usually the case) additionally require the SBV approval earlier than issuance. The SBV approval course of for a overseas borrowing consists of two steps, being (i) affirmation that the overseas borrowing quantity falls throughout the nationwide debt restrict (set by the Prime Minister) and (ii) registration of the transaction agreements for such overseas borrowing. Quick-term loans aren’t required to be registered with the SBV though debtors are required to adjust to sure borrowing situations. Amongst different situations, short-term loans can’t be used for medium- and long-term functions.
The SBV has lately issued a draft round to exchange Round 12 (“Draft Round”). The context of the Draft Round is, as defined within the SBV’s drafting word, the surge in overseas borrowings that might simply exhaust the nation’s annual debt restrict. By additional creating parameters of the approval course of, the legislative transfer goals to higher monitor and management overseas borrowings by native companies in order to reinforce the standard of Vietnam’s debt profile. The Draft Round, in present kind, would have a major structuring influence on overseas debt incurred by native debtors. On this authorized replace, we focus on notable elements of the proposed new regime and our key takeaways.
Caps on Borrowing Value
Though Round 12 has at all times empowered the SBV Governor to resolve a cap on borrowing value as and when wanted, this discretion has by no means been exercised by the Governor. It’s due to this fact virtually doable to borrow at excessive value in restructuring or VC/PE financing offers when acquiring SBV approval. The Draft Round applies a extra rigorous strategy and introduces, for the primary time, the next caps on borrowing value of floating charge borrowings:
- For overseas borrowings in overseas foreign money: If a reference rate of interest (e.g., LIBOR, EURIBOR, SOFR Time period Charge, and so forth.) is adopted, the cap would be the whole of such reference rate of interest plus 8% every year.
- For overseas borrowings in Vietnamese Dongs (virtually obtainable in very restricted circumstances): The cap will probably be a complete of the 10-year authorities bonds rate of interest plus 8% every year.
The Draft Round doesn’t present for any cap on fastened charge overseas borrowings. It’s doable that, in observe, the SBV will set caps to fastened charge borrowings analogous to these relevant to floating charge borrowings.
As defined by the SBV, the usage of caps on borrowing value limits overseas borrowings to native debtors which are basically creditworthy and due to this fact eligible to faucet overseas capital sources at an affordable value. Given this philosophy, it’s unlikely that the SBV will entertain a request for a waiver of the caps even within the context of restructuring or VC/PE financing offers.
For background, borrowing value is outlined within the Draft Round as being the overall value payable by a borrower to its lenders, safety suppliers, insurers, brokers and different related events and such value contains curiosity, IRRs and different prices and bills referring to the borrowing, all of which is to be calculated as a share every year of the overall borrowing quantity. The Draft Round particularly excludes default curiosity, dedication charges on undrawn commitments, prepayment prices, hedging prices and withholding taxes. Nevertheless, the record of exclusions seems exhaustive, i.e., something not particularly talked about (by exclusion) is to be included for the aim of calculating borrowing value. Underneath this assemble, it’s doable that different cost obligations comparable to indemnities needs to be included within the calculation of borrowing value. That is difficult as these obligations are uncapped and, extra importantly, can’t be pre-determined. Though one can count on the observe for calculation of borrowing value to develop over time, it stands to motive that these obligations needs to be excluded from the calculation of borrowing value as there isn’t a foundation to calculate such obligations until these are capped.
Requirement on FX Hedging
For the primary time, FX hedging is compulsorily imposed as a safeguard towards foreign money fluctuation. The brand new requirement below the Draft Round would create further borrowing value. Debtors should procure the next foreign money hedges with native banks (that are licensed to supply hedge providers):
- For brief-term overseas borrowings: FX hedges are required for any short-term overseas borrowing with a principal of greater than US$500,000 (or equal different overseas foreign money). Such hedges should be in place on or previous to drawdown and canopy at the very least 30% of the principal.
- For medium- and long-term overseas borrowings: FX hedges are required for every reimbursement of principal higher than US$500,000 (or equal different overseas foreign money). Such hedges should be in place no later than 3 months previous to the related reimbursement date and canopy at the very least 30% of the related reimbursement quantity.
Notably, debtors who’re (i) credit score establishments and branches of overseas banks, and (ii) these having “enough overseas foreign money incomes” (e.g., exporters) are exempted from the FX hedging requirement.
Requirement on Appointment of Native Safety Agent
In line with the Draft Round, when overseas borrowings are secured by collateral belongings positioned in Vietnam, overseas lenders and bondholders should appoint Vietnamese credit score establishments (together with overseas financial institution branches) or different Vietnamese entities to behave as safety brokers, until the secured events obtain task (i.e., switch of possession) of the collateral belongings as full satisfaction and discharge of the secured obligations.
In the mean time, the idea of a safety agent is just not fully clear below SBV laws. It’s only within the context of a syndicated mortgage the place SBV laws particularly permit a syndicate member to behave because the safety agent for and on behalf of the syndicate as a complete. Due to this fact, in different (non-syndicated) mortgage financings (e.g., bilateral loans), native banks are hesitant to simply accept safety agent roles absent a transparent authorized foundation. The change is due to this fact welcome because it, to a sure extent, creates a authorized foundation for native banks to behave as safety brokers in all secured overseas borrowings.
Extra Necessities on UOPs
Underneath Round 12, use of proceeds functions (“UOPs”) for medium- and long-term overseas borrowings are restricted to (i) financing manufacturing and funding tasks of debtors or their investee corporations (which embrace acquisition financings for M&A functions) and (ii) refinancing debtors’ overseas borrowings at extra favorable phrases. As well as, debtors can’t use proceeds of short-term overseas borrowings for medium and long-term use functions. It stays a gray space whether or not short-term loans can be utilized for M&A functions.
The Draft Round clarifies UOPs for each short-term overseas borrowings and medium- and long-term overseas borrowings. Usually, a short-term overseas mortgage should be used to pay short-term liabilities (that are due and payable inside 12 months from signing of the transaction agreements). Nevertheless, the next UOPs are particularly not permitted for short-term overseas loans (i) refinancing onshore money owed, (ii) financing securities buying and selling (e.g., margin loans), (iii) financing share acquisitions for M&A functions, and (iv) financing funding in actual property belongings and tasks.
Permitted UOPs for medium- or long-term overseas borrowings are (i) financing funding tasks of debtors, (ii) rising the capital of debtors for reliable manufacturing or enterprise functions, offered that the ratio of medium- and long-term debt to fairness doesn’t exceed 3:1 and (iii) refinancing overseas money owed of debtors. There are 4 problems with specific word, which we describe under.
First, the Draft Round, specifically, removes the power of a borrower to make use of its medium- and long-term loans to finance funding or manufacturing tasks in its subsidiaries. That is doable below Round 12 by means of fairness or mortgage investments into subsidiaries. The SBV has not supplied any rationalization of this removing and its intent stays unclear. This can hopefully be additional clarified by the SBV as, if adopted, this might pose a difficulty for group buildings the place funds are raised by mother or father corporations to be used by subsidiaries (a place that’s frequent).
Second, for the capital improve goal, the three:1 debt to fairness ratio is a brand new requirement. Fairness contains constitution capital and different fairness objects, whereas debt is proscribed to medium- and long-term monetary debt and doesn’t embrace short-term debt and commerce debt.
Third, for the refinancing goal, the Draft Round removes the situation that the refinancing phrases should be extra favorable. As a substitute, the brand new overseas borrowing quantity should not exceed the excellent quantity of the refinanced borrowing. That is seen as logical on condition that debtors virtually solely refinance at phrases extra favorable than their present debt.
Lastly, we word that the Ministry of Finance (the “MOF“) is individually engaged on a draft regulation governing bonds issued by Vietnamese corporates in Vietnam or internationally. For bonds issued internationally in foreign currency echange, the draft regulation merely requires that UOPs for these bonds adjust to relevant laws of the markets the place bonds are supplied. There is no such thing as a particular restriction relevant to UOPs for these bonds as is at present offered below the draft regulation proposed by the MOF. The SBV ought to contemplate the strategy taken below this draft regulation to make sure that there may be consistency between the 2 proposed legislative paperwork.
Takeaways
The Draft Round illustrates a decided effort by the SBV to tighten standards relevant to overseas borrowings made by native companies. Throughout a time of worldwide turmoil, provide chain disruption and default dangers (illustrated by failings comparable to China’s Evergrande), this effort goals to safeguard Vietnam’s overseas debt profile. Though the Draft Round stays (at time of writing) open to public remark (with a view to steadiness the SBV’s coverage aims with the wants of related stakeholders), the SBV is clearly migrating in direction of a extra rigorous overseas borrowings administration regime. While the caps on overseas borrowings, necessities on FX hedging, necessities on appointment of native safety agent and extra necessities on UOPs create a extra sturdy system, this might all collectively on the identical time stifle worldwide fundraising makes an attempt by native companies for reliable industrial actions. Hopefully, any issues expressed by stakeholders will probably be taken under consideration by the SBV when balancing its personal reliable goals.
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