Draft Circular proposes significant changes for foreign lenders and domestic borrowers 5 min read
The Draft Circular replacing the current circular No. 12/2014/TT-NHNN on conditions for non-government guaranteed cross-border foreign loans (the Current Circular) was released on 11 May 2022 for public consultation. It proposes to tighten conditions for taking out these loans, in order to manage Vietnam's overall borrowing exposure and ensure proper use of foreign loans.
This Insight explains the potential impacts of the Draft Circular on foreign lenders and domestic borrowers. The public has 60 days to comment.
Key takeaways
- Short-term foreign loans cannot be taken out to fund onshore debts, securities trading and acquisition of shares/capital contribution, project or real property in Vietnam.
- To take out a medium-or long-term loan to finance a Vietnamese borrower's business activities, the borrower's total amount of all medium-or long-term loans (including offshore and onshore) must not exceed:
- three times its equity, as recorded in its latest audited financial statements; or
- its charter capital, if its equity is lower than its charter capital.
- The borrowing costs of foreign loans are proposed to be capped.
- For the first time, the Vietnamese borrower will be required to hedge its borrowings, to mitigate potential exposure to the risk of currency fluctuation.
- If the foreign loan is secured by assets in Vietnam, the foreign lender will be required to appoint a Vietnamese security agent.
Further limitation on foreign loan use purposes
Under the Current Circular, a short-term foreign loan can be taken out for working capital purposes and cannot be used for a medium-or long-term purpose; and a medium-or long-term foreign loan can be taken out to:
- finance an investment project or business/production plan of the borrower, or of enterprises directly invested in by the borrower; and
- refinance an existing foreign loan of the borrower.
The Draft Circular proposes to further limit the use of foreign loans by a non-credit institution borrower, as follows:
- Short-term loans: a short-term foreign loan can only be used for settlement of short-term payables/debts coming due within 12 months from the date of the loan agreement. Furthermore, short-term foreign loans cannot be used for payment of:
- onshore debts;
- purchase of securities, acquisition of shares/contributed capital, and project transfer; and
- acquisition of real property.
- Medium-or long-term loans: A medium-or long-term foreign loan can only be used for the following three purposes, subject to certain restrictions for each purpose:
- Financing for the borrower's investment projects: Similar to the Current Circular, the borrower may only borrow money up to an amount that is the difference between the borrower’s contributed capital in the project (eg charter capital) and the total investment capital specified in its investment licence/in-principle investment approval. All the borrower's existing onshore and offshore medium-or long-term loans will be counted towards this borrowing limit.
- Financing for borrower's capital increase for its business activities: The Draft Circular provides for a new requirement that the outstanding medium-or long-term loan for both the borrower's offshore and onshore loans must not exceed three times its equity, as recorded in its latest audited financial statements; or its charter capital, if its equity is lower than its charter capital.
- Refinancing of the borrower's existing foreign loan: Unlike the Current Circular, which requires the borrowing costs of the refinancing loan (which comprise interest and relevant fees) not to exceed those of the refinanced loan, the Draft Circular requires that the principal of the refinancing loan must not exceed the outstanding principal and interest of the refinanced loan. It is not clear if the new provision implies that, apart from the outstanding principal and interest, the borrower cannot use the new refinancing loan to pay the relevant fees of the refinanced loans, such as commitment fees, prepayment fees and agency fees.
Notably, the Draft Circular seems no longer to permit the use of medium-or long-term foreign loans to finance an investment project or business/production plan of enterprises directly invested in by the borrower (eg the borrower's subsidiary).
Cap on borrowing costs
The Draft Circular clearly defines the borrowing costs of a cross-border foreign loan to be aggregate amounts payable to the lender, securing party, agent and other relevant parties, comprising interest, internal return rate, and other related fees and expenses, which will be calculated in percentage per annum out of the total principal of the foreign loan.
The Draft Circular proposes to cap the borrowing costs of a foreign loan at:
- reference rate + 8% per annum in case the loan uses a reference rate;
- or six-month term SOFR rate + 8% per annum in other cases.
FX hedging requirement
The Draft Circular requires the Vietnamese borrower, for the first time, to hedge its borrowings to mitigate its potential exposure to the risk of currency fluctuation. In particular:
- For a short-term loan: The hedging requirement applies to any short-term loan having a principal of more than US$500,000. In this case, the hedging value must be equal to at least 30% of the actual disbursement amount, and the hedging transaction must be conducted before or on each disbursement date.
- For a medium-or long-term loan: The hedging requirement applies to any repayment instalment of a medium-or long-term loan that exceeds US$500,000. In this case, the hedging value must be equal to at least 30% of each instalment repayment and the hedging transaction must be conducted at least three months before each repayment date.
This requirement does not extend to:
- borrowers that are credit institutions or foreign bank branches; and
- borrowers who expect to have sufficient revenue in foreign currencies to pay a foreign loan.
It is also worth noting that all foreign loans executed before the effective date of this Draft Circular (if passed) are also required to be FX hedged if not fully drawn.
Requirement for appointment of a Vietnamese security agent
The Draft Circular introduces a new requirement for having a Vietnamese security agent. Accordingly, if the foreign loan is secured by assets in Vietnam, the foreign lender is required to appoint a Vietnamese security agent, being either a credit institution, foreign bank branch or an institutional entity established and operating under the laws of Vietnam, to assist with the security enforcement process. This rule does not apply in the case of the lender electing to take over the secured assets for enforcement.
What's next?
According to the public consultation process, the public has 60 days to comment. If you have any questions about the Draft Circular, or would like to get involved in the public consultation on it, please do not hesitate to contact us.