New draft circular regulates non-government guaranteed foreign loans

A draft circular dated May 10, 2022 providing conditions on non-government guaranteed offshore loans will replace Circular No.12/2014/TT-NHNN dated February 26, 2014 issued by the State Bank of Vietnam.

Details are as follows:

- The conditions provided for under the draft do not apply to offshore loans under the form of importing goods with deferred payment.

- Providing basic contents of the plan for utilization of offshore loans.

- Defining financing cost. The financing costs applicable to offshore loans are the total costs payable by the borrower to offshore lender(s), guarantors, insurers, agents and other related parties that include interest rate, internal rate of return, other related fees but excludes default interest, commitment fee for not having utilized the offshore loans as scheduled, prepayment fee, fees for engaging and conducting foreign currency exchange/interest rate hedging transactions and contractor tax.

- Regulating the cap fee applicable to foreign currency offshore loans as follows:

+ In relation to offshore loans with a reference interest rate: reference interest rate + 8% per year; and

+ In relation to offshore loans without a reference interest rate: SOFR Term Rate + 8% per year.

Accordingly, SOFR Term Rate is the SOFR Term interest rate with six-month term published by CME on its official website and is determined at the closest time before the signing date of the offshore loan agreement.

- Defining and regulating foreign exchange hedging transactions. Accordingly, the borrower is required to engage in foreign exchange hedging transactions in cases where short-term as well as medium and long-term foreign loans are under certain conditions. Specifically:

+ In relation to short-term offshore loans: The borrower is required to engage in foreign exchange hedging transactions if the commitment/credit limit is over $500,000.

+ In relation to medium- and long-term offshore loans: The borrower is required to engage in foreign exchange hedging transactions for repayment of the principal amount, each of which is over $500,000.

- Offshore lenders and related parties are also required to appoint a security agent to receive, manage and enforce the security if the offshore loan is secured by secured assets to be placed within the territory of Vietnam. The security agent shall be either credit institutions, foreign bank branches or other entity established and operating under the laws of Vietnam. However, this condition shall not be applied to cases where the securing party and secured party agree that the secured party will assume secured assets to replace the performance and fulfillment of secured obligations.

- Detailing the purposes of short-term foreign loans. Accordingly, the borrower is allowed to borrow short-term offshore loans to pay short-term debts payable within 12 months from the signing date of such a short term loan agreement. However, these debts do not include:

+ Debts incurred from loan contracts entered into between the borrower and residents;

+ Debts incurred from purchase of trading securities; purchase/acquire of capital contribution or shares of other entities; purchase of investment real-estate and transfer of projects.

- Regulating a limitation on foreign lending for the purpose of increasing borrower capital for business activities. Accordingly, the borrower must ensure that the balance of both medium- and long-term onshore and offshore loans (including proposed offshore medium-term and long-term loans) of the borrower must not exceed three times that of its equity as recorded in the most recent audited financial statement or charter capital in case the equity is lower.

- Besides, the draft also regulates transitional terms for transactions involving offshore borrowing and debt repayment signed before the effective date of the new circular. Basically, signed transactions will continue to comply with the regulations at the time of signing. However, in relation to (i) short-term loan agreements with a commitment/credit limit of over $500,000 or equivalent in other foreign currencies that have not been fully utilised, and (ii) medium- and long- term loan agreements that have not been fully repaid and are subject to hedging transactions, such transactions must conduct hedging transactions to mitigate risks.

The State Bank of Vietnam is gathering and collecting public opinions on the latest draft which, upon being officially issued, may vary.