Issue of January 2023 – Draft circular on requirements for taking foreign loans applied to companies not guaranteed by the goverment

Dear Valued Clients,

Recently, the State Bank of Vietnam (“SBV’) has announced the Draft of the Circular on requirements for taking foreign loans applied to companies not guaranteed by the Government (the “Draft Circular”) to replace Circular No. 12/2014/TT-NHNN of the SBV dated March 31, 2014 (“Circular 12”).

In this Legal Update, we would like to emphasize several highlights which could give affect on requirements for taking foreign loans applied to companies not guaranteed by the Government since this Draft Decree is adopted.

1.      Ceiling limit for foreign loan expenses

Previously, according to Circular 12, if necessary, the Governor of the SBV shall decide the application of foreign loan expense requirements, decide and announce the ceiling level of foreign loan expenses in order to regulate the limits of foreign loans in each period[1]. However, the SBV has not limited the of ceiling loan expenses in practice.

According to the Draft Circular, the SBV proposes to stipulate a ceiling level of loan expense divided by the currency of loans, which is Vietnam dong and foreign currencies to ensure a closer reflection of the loan expenses of each currency of loans. Regarding loan expenses in foreign currencies, in fact, the method of calculating loan interest is very diverse and therefore, the SBV has limited the ceiling level of loan expenses according to the criteria of loans using the reference interest rate or not using the reference interest rate to cover the basic methods of calculating interest rates in the present time.

Accordingly, the ceiling level of expense of loans with floating interest is specified as follows:

(i)      For foreign loans in foreign currency:

• For loans using reference interest rate, the Draft Circular proposes a ceiling level of loan expense for foreign currency loans using reference interest rates at high levels compared to historical statistics (reference interest rate + 5%/year) + about 3% /year for fees, equivalent to the reference rate + 8%/year[2].
• For loans not using the reference interest rate, choosing the interest rates “SOFR Term for 6-month term announced by CME” to calculate the ceiling level of expense for loans not using the public available reference interest rate are completely appropriate. Because SOFR Term interest rates announced by CME are term interest rates calculated based on SOFR interest rates announced by the FED New York and recommended by the Alternative Reference Rates Committee of FED’s New York. Therefore, using this level ensures that the ceiling level closely follows interest rate fluctuations in the international market; avoid setting “imposed” fixed rates on expense that are not marketable; limit the need to amend the Circular when there is a large interest rate fluctuation in the market.

(ii)      For foreign loans in Vietnam dong:

Draft Circular sets the ceiling level on the reference of Vietnamese Government bond interest rates plus a margin of 8%/year[3]. Government bonds are debt instruments with very low risk, high stability; interest rates on government bonds reflect the government’s loan expenses (which have almost no credit risk), so it can be used as a reference interest rate to calculate the ceiling level.

The Draft Circular selects the reference to the interest rate of the bid-winning Government bonds (actual interest rate for government bonds issued for the first time – the primary market) which is the interest rate that more closely reflects the bond price that the buyer is willing to buy; and the reference level at 10-year tenor is a government bond that is regularly traded with a large trading volume, which is representative of government bond interest rates in general and is convenient for searching.

2.      Executing foreign currency derivative transactions

This is considered one of the new points of the Draft Circular once compared to Circular 12. Mandatory forex hedging was first introduced as a hedge against currency fluctuations. The requirement to conduct foreign currency derivative transactions under the Draft Circular will incur additional loan expenses. The borrower must ensure that the following currencies are hedged against foreign exchange risks with local banks (which are licensed to provide hedging services).

The borrowers must conduct foreign currency derivative transactions according to the following principles[4]:

• For short-term foreign loans, the borrower must conduct foreign currency derivative transactions for short-term foreign loans with a loan turnover of over USD 500,000 or another foreign currency of equivalent value; the time of implementation before or at the time of capital withdrawal of the loan; the minimum transaction value is equal to 30% of the withdrawal value; the transaction term is consistent with the repayment plan of short-term foreign loans;
• For medium and long-term foreign loans, the borrower must conduct foreign currency derivative transactions for remittances to repay the principal with a value of over USD 500,000 or another foreign currency of equivalent value; at least 3 months before the principal repayment date; the value of the transaction is at least 30% of the principal repayment amount; the transaction term is consistent with the principal repayment plan of the foreign medium and long-term loan.

It is worth noting that the borrowers are credit institutions and foreign bank branches, and organizations/individuals with “sufficient foreign currency income” (e.g. exporting companies) are exempt from the foreign exchange hedging requirement[5].

3.      Secured transactions for foreign loans

In addition to the ceiling limit for loan expense and foreign currency derivative transactions, secured transactions for foreign loans are also another new point of this Draft Circular. According to the provisions of Article 8.1 of the Draft Circular, the borrower and related parties agree on security transactions for foreign loans on the principle of self-responsibility to comply with the provisions of current law on secured transactions and other relevant legal provisions.

In case a foreign loan has collateral in the territory of Vietnam, the lender and related parties must use a representative organization to handle collateral which is a credit institution or foreign bank branch or other legal entity established and operating under Vietnamese law, unless the securing party and the secured party agree on the disposal of the security property in the manner that the secured party receives the security property itself to substitute for the performance of a guaranteed obligation[6].

Currently, the concept of a representative organization that handles collateral has not been clearly defined by the SBV. This concept is only applied in the context of syndicated lending where the SBV’s regulations specifically allow a syndicated member to act as a representative organization to handle the collateral and represent the entire syndicated lenders. Therefore, in other loan financing, domestic banks are often hesitant to accept the role of representative organization to handle collateral when there is no clear legal basis. This change is favored because to a certain extent, it creates a legal basis for domestic banks to act as representative institutions dealing with collateral related to all guaranteed foreign loans.

4.     Restrictions on foreign borrowing purposes

The Draft Circular has narrowed down the purposes for which enterprises can borrow foreign capital. Specifically:

• For short-term foreign loans, enterprises entitled to get foreign loans to pay short-term debts are obliged to pay within 12 months from the time of signing the foreign loan agreement[7]. However, this purpose does not include the payment of (i) domestic loans to residents, and (ii) debts arising from transactions to purchase trading securities, purchase capital contributions or shares of other companies, purchase investment real estate or receive project transfers. Meanwhile, Circular 12 does not currently impose similar restrictions, but only requires borrowers not to borrow short-term foreign loans for medium/long-term purposes. That means that according to the Draft Circular, an enterprise cannot use short-term foreign loans for its production and business activities.
• For medium and long-term foreign loans, enterprises get foreign loans to (i) implement investment projects according to the enterprise’s Investment Registration Certificate or Decision approving the investment policy, (ii) ) increase the size of capital for production and business of enterprises, or (iii) restructure existing foreign loans of enterprises. A positive change related to the end goal is that the Draft Circular removes the condition that the new foreign loan does not increase loan expense as in the current Circular 12. However, the Draft Circular no longer allows borrowers to get foreign loans to implement business plans or projects of subsidiaries as permitted in Circular 12.

5.     Foreign loan limit

According to the Draft Circular, the foreign loan limit is as follows:

(i)      For the borrower being a credit institution, foreign bank branch[8]

When obtaining short-term foreign loans, the borrower must ensure the maximum ratio of total outstanding short-term foreign loans (including short-term foreign loans expected to be realized) calculated on own capital at the last working day of the year immediately preceding the time of signing the foreign loan agreement according to the following schedule:

• In 2023: 25% for credit institutions and 100% for foreign bank branches;
• From 2024 onwards: 20% for credit institutions and 80% for foreign bank branches.

For medium and long-term foreign loans, the Borrower must ensure the total net withdrawal (withdrawal value minus the repayment value) of the Borrower’s foreign medium and long-term loans during the year (including medium and long-term foreign loans expected to be made) calculated on own capital at the last working day of the month immediately preceding the time of signing the foreign loan agreement, the maximum amount shall not exceed:

• 10% applies to the Borrower being a commercial bank;
• 50% applies to Borrowers who are non-bank credit institutions, foreign bank branches, cooperative banks, policy banks.

(ii)      For the borrower who is not a credit institution or foreign bank branch, the borrower must meet the following foreign medium and long-term loan limit[9]:

In case of foreign loans for the implementation of an investment project: the balance of medium and long-term domestic and foreign loans of the Borrower to serve that project (including medium and long-term foreign loans expected to be made) does not exceed the difference between the total investment capital and the contributed capital recorded in the Decision approving the investment policy, the Investment Registration Certificate.

In case of foreign loans to increase the size of capital for production and business activities of the Borrower: the Borrower must ensure the balance of medium and long-term loans in the country and abroad (including medium and long-term foreign loans expected to be made) of the Borrower does not exceed 03 times the equity according to the most recent audited financial statement at the time of signing the foreign loan agreement or the charter capital in case the equity is lower than the charter capital of the Borrower.

In case of foreign loans to restructure existing foreign loans of the Borrower: the maximum loan turnover shall not exceed the outstanding principal and interest of the restructured foreign loan.

As usual, we hope you find this Legal Update helpful and look forward to working with you in the upcoming time.

Kind regards,

ENT Law LLC

The full version of this Legal Update can be found here.

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[1] Article 9.2 Circular 12.

[2] Article 9.1(a) Draft Circular 12.

[3] Article 9.1(b) Draft Circular 12.

[4] Article 10.1 Draft Circular.

[5] Article 10.2 Draft Circular.

[6] Article 8.2 Draft Circular.

[7] Article 15 Draft Circular 12.

[8] Article 13 Draft Circular 12.

[9] Article 16 Draft Circular.