Vietnam: Vietnam tightens conditions for offshore loans – Lexology

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In brief
The State Bank of Vietnam (SBV) released a draft circular on conditions for enterprises' offshore loans without government guarantee ("Draft Circular"), which aims to replace Circular No. 12/2014/TT-NHNN dated 31 March 2014 ("Circular 12"). The Draft Circular tightens the control on offshore loans to tackle the risk of excess national foreign debt quota and to promote the onshore loan market. Borrowers are now expected to meet additional conditions to borrow offshore loans without government guarantee.
Notable points of the general and specific conditions applicable to borrowers under the Draft Circular are as follows:
Further details regarding these are addressed in the client alert here, along with other new additional points of the Draft Circular.
In depth
1. General conditions
a. Requirement of appointment of an onshore enforcement agent with regards to Vietnamese-located collaterals
The Draft Circular requests that in case the offshore loan is secured by collaterals in Vietnam, parties to the loan agreement must engage a credit institution, foreign bank branch, or other legal entity established and operating under Vietnamese law to act as an enforcement agent.
The exception to this requirement is applied in the case w here the securing party and the secured party has agreed that in the case of enforcement, the secured party shall take over the collateral in lieu of the performance of the secured liabilities.
There are some implications regarding the proposed provision as follow s:
(i) To take the enforcement agent role, the onshore enterprises should be licensed to conduct such activities. It seems that current Vietnamese law only provides for the activity of "asset management agency" under Article 106 of Law on Credit Institutions. Up to now , it seems that only credit institutions and foreign bank branches are licensed to carry out "asset management agency" activities, and therefore can be allow ed to take the role of enforcement agent. How ever, the Draft Circular suggests that legal entities established and operating under Vietnamese law (other than credit institutions and foreign bank branches) can also be security agents in cross-border financings. As such, further guidance on the conditions for such legal entities to take the enforcement agent role should be promulgated by the SBV.
(ii) In practice, most financing transactions usually include the role of security agent, w hich is authorized by secured parties to hold the security from the execution of the security agreement. Upon the occurrence of an enforcement event, the security agent may directly handle the enforcement of secured assets or appoint one or more entities or persons to be an enforcement agent for the purposes of exercising the rights of the security agent. The draft provision raises the question as to w hether the onshore enforcement agent w ould need to be appointed from the execution date of the security agreement or may be authorized by the security agent w hen the security is enforceable if the security agent is an offshore entity.
(iii) In addition, it is unclear w hether parties are required to engage an onshore entity to act as the enforcement agent in the foreign financing transactions involving collaterals located in Vietnam, particularly purely offshore bilateral loans. If this is the case, there may be hesitation by offshore lenders to lend to onshore borrow ers as the security structure may be burdensome and inflexible.
b. Imposing a ceiling on borrowing costs
The current Circular 12 sets forth a principle that, if necessary, the SBV Governor may determine the ceiling on borrow ing costs for each interest period. In fact, the Governor has not imposed a ceiling on the borrow ing costs for offshore loans. Under the Draft Circular, the SBV proposes a specific ceiling on borrow ing costs as follow s: (i)For offshore loans denominated in foreign currency:
 In case the reference rate is used: Reference rate + 8% per annum; or
 In case the reference rate is not used: SOFR Term Rate1 + 8% per annum.
(ii) For offshore loans denominated in Vietnamese Dong: Vietnamese Government bond interest rate + 8% per annum.
The interest rate of Vietnamese Government bonds is the latest implemented interest rate of 10-year government bonds in Vietnamese Dong as determined prior to the signing date of the loan agreement and its relevant amendments/supplements .
The Draft Circular defines that offshore borrow ing expenses may include interest, internal rate of return (IRR), other related fees and charges, that borrow ers have to pay to lenders, guarantors, insurers, agents, and other stakeholders, and exclude late payment interest, commitment fee (if draw dow n is not made), prepayment fee, fee for foreign currency derivatives, fee for interest rate derivatives, foreign contractor tax. The borrow ing costs are converted at an annual percentage of loan quota.
Borrow ers are responsible for preparing a table of estimated offshore loan expenses in compliance w ith the follow ing principles:
(i) The offshore loan expenses are estimated at the time of signing of the loan amendment and its relevant amendments/supplements.
(ii) The table of offshore loan expenses must be signed by the legal representative of the borrow er to guarantee the accuracy.
The borrow ing cost w ould apply for both medium/long-term offshore loans and short-term offshore loans.
For medium and long-term offshore loans, the SBV shall supervise compliance w ith borrow ing cost ceilings via offshore loan registration procedures. For short-term loans, under the Draft Circular, the borrow er is required to declare the table of estimated offshore loan expenses to the account bank w hen making a draw dow n or repayment.
This means that the account bank shall be in charge of the supervision role to verify offshore borrow ing costs upon draw dow n and repayment. The offshore lenders, borrow ers and account banks are advised to take into account the above proposal. If there is no change once officially issued, it may affect their calculation method of borrow ing costs and impose more compliance obligations. 
c. Foreign currency derivatives
The Draft Circular proposes that borrow ers must conduct the exchange rate hedging in the follow ing cases:
6e12ddee 8243 4094 86f4 1d99fa0fa206The requirement to conduct the hedging does not apply to either:
(i) Credit institutions, foreign bank branches licensed to provide foreign exchange services (since they already have specialized hedging procedures for foreign exchange)
(ii) Borrow ers w ho are expected to have sufficient revenue in foreign currency for loan repayment (as also called "natural hedge")
The Draft Circular does not provide any further guidance on how to prove the sufficient revenue.
Furthermore, it is proposed that the foreign currency derivatives bank must present documents on offshore loan to the account bank upon repayment to facilitate the verification of the account bank. Although not clearly stated, it may be understood that the account bank and the foreign currency derivatives bank can be different entities.
This requirement is proposed to be applied retroactively for offshore loan agreements executed prior to the effective date of the Draft Circular in the follow ing cases:
(i) short-term offshore loan w ith loan amount of more than USD 500,000 or in other foreign currency of equivalent value signed prior to the effective date of the Draft Circular but have not fully disbursed
(ii) medium and long-term offshore loans signed prior to the effective date of the Draft Circular but for w hich the principal has not been fully repaid 
2. Particular conditions
a. Purpose of the Loan: Borrowers being credit institutions and foreign bank branches
Borrow ers being credit institutions and foreign bank branches can borrow offshore loans for the follow ing purposes:
(i) To scale up capital to serve the borrow er's legitimate business activities. The restriction of short-term loans only being able to be used for supplementing short-term credit capital has been removed from the Draft Circular.
(ii) To refinance the borrow er's existing offshore loan. The requirement of borrow ing costs for the new loan not being higher than the cost of the existing loan has been removed from the Draft Circular.
Furthermore, under the Draft Circular, credit institutions and foreign bank branches must also require to satisfy offshore loan limits as follow s: 
131d1eae 76ea 4764 a600 4d26545f32eeb. Purpose of the Loan: Borrower not being credit institutions and foreign bank branches
Changes are made regarding borrow ing purposes of borrow ers not being credit institutions and foreign bank branches:
(i) For short-term loans: to repay short-term debts payable w ithin 12 months as from the signing date of the loan agreement , excluding debts arising from both:
 Loan agreements w ith residents
 Payment for securities trading, shares/capital contribution, real estate investment and transfer of the project
(ii) For medium and long-term loan:
 To implement the investment project of the borrow er
 To increase capital to serve for the production and business of the borrow er
 To refinance the borrow er's existing offshore loan (borrow ing costs are not taken into account)
Also, the SBV also sets stricter rules on offshore borrow ing limits as follow s:
bf8240b9 0974 4603 9e3d 8bd908a5b46a3. Others
a. Signing date of the loan agreement
The Draft Circular proposes more flexibility for foreign investors regarding the signing date of the loan agreement. Circular 12 provides that foreign investors must sign the loan agreement only prior to draw dow n date. Under the Draft Circular, the loan agreement can be signed either prior to or on the draw dow n date.
The loan agreement can only be executed on the draw dow n date in the cases w here (i) a credit institution, foreign bank branch borrow s an offshore short-term loan, or (ii) the capital transferred to Vietnam by foreign investors for payment of investment preparation costs is converted into offshore loan by the invested enterprises.
b. Transitional provisions
Under the Draft Circular, offshore loans executed prior to the effective date of the Draft Circular may continue to be implemented according to their original terms, but that any amendments to w hich may only take effect if such amendments meet the new conditions under the Draft Circular.

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