The State Bank of Vietnam (“SBV”) released a draft Circular on 11 May 2022 strengthening conditions for non-government guaranteed foreign loans (the “Draft Circular”) which aims to replace Circular No. 12/2014/TT-NHNN (the “Current Circular”).

In the Draft Circular, the SBV indicates its intention to tighten control over foreign loans to address the risks on currency fluctuation and the national debt limit. The SBV is still finalizing the Draft Circular and there is no guarantee the contents of the Draft Circular will remain the same before it is officially issued later this year. Some key changes in the Draft Circular are set out below.

1-  Foreign loans allowed for limited purposes

Unlike the Current Circular, in which the loan’s purpose was not explicitly prescribed for foreign loans of various tenors (i.e., short-term, medium-term and long-term), the Draft Circular would require each type of foreign loan be limited to a specific purpose as follows:

Short–term Loans

• Private enterprises will only be permitted to access foreign short-term loans for the purpose of repaying debts coming due within 12 months from the date of the loan agreement.
• Further, the SBV plans to prohibit the use of foreign short-term loans to be used for:

1. 1. 1. Onshore debts;
      2. Debts arising from purchase of securities;
      3. Debts arising from acquisition of shares/contributed capital in other entities; and
      4. Debts arising from acquisition of real property and project transfers.

• In addition, a borrower must also submit a plan indicating its borrowing cost on or prior to the first drawdown date or first repayment date to its bank where the foreign short-term loan account is to be opened and maintained for the purpose of loan drawdown and repayment.

Medium and Long-term Loans

In addition to the same restriction in place under the Current Circular (i.e., only permitted for financing of the borrower’s investment projects that have been issued an investment registration certificate or an investment policy decision), foreign medium and long-term loans under the Draft Circular will be permitted only for the following purposes:

• Financing business operation needs: The Draft Circular proposes a new condition that requires a borrower’s total onshore and offshore medium and long-term loans (including any proposed foreign medium and long-term loans) be capped at an amount being the greater of the following: (i) 3 times the borrower’s equity (as recorded in its latest audited financial statement); and (ii) 3 times the borrower’s charter capital.
• Refinancing existing foreign loans: Unlike the Current Circular, in which the borrower must ensure that the borrowing cost of a new foreign loan (i.e., the refinancing loan) does not exceed the borrowing cost of its current foreign loan, the Draft Circular requires that a refinancing loan must not exceed the outstanding principal and interest of the refinanced loan.

2-  Borrowing cost ceiling

Under the Draft Circular, the borrowing cost is specifically defined as the sum of payables to the lender, the guarantor, the insurer, the agent and other parties participated in the loan transaction (including but not limited to interest, internal rate of return, and other relevant fees and expenses), and is capped as below:

• Foreign loans in foreign currency: is capped at either the reference rate plus 8% per year; or, if no reference rate, then the 6-month term SOFR Rate (by which terms are defined as a benchmark interest the borrowing cost rate for dollar-denominated derivatives and loans published by the Federal Reserve Bank of New York) plus 8% per year.
• Foreign loans in Vietnamese Dong: the borrowing cost is capped at the 10-year Vietnamese government bond rate (by which the rate is calculated based on the win rate of the 10-year Vietnamese government bond on the primary market as published by the Hanoi Stock Exchange on its website) plus 8% per year.

3-  Required FOREX hedge

In the Draft Circular, the SBV intends to protect private enterprise borrowers from substantial losses due to exchange rate fluctuations by requiring them to enter into a compulsory foreign currency hedging transaction. A FOREX hedge is required in two situations: (i) the value of a short-term foreign loan is greater than USD 500,000; or (ii) the value of each repayment installment of a medium or long-term foreign loan is greater than USD 500,000. However, this requirement does not apply to credit institutions, foreign bank branches or borrowers that have sufficient foreign currency receivables to cover their repayment obligations. A significant feature of this Draft Circular regulation is that it is intended to apply retroactively with respect to: (i) short-term foreign loans if the principal has not been fully drawn; and (ii) medium and long-term foreign loans if the principal has not been fully repaid.

4-  Engaging a security agent

If any foreign loans are secured by assets in Vietnam, the lender must engage a duly established Vietnam corporate entity (including a credit institution, a foreign bank branch or any other corporate entity that is duly licensed to engage in security enforcement activity) to act as a security enforcement agent before enforcement takes place. This requirement is not applicable if the lender takes possession of the secured assets in lieu of the repayment obligations following an enforcement.

As indicated above, the Draft Circular introduces a number of important amendments and new provisions. This legislation, if and when issued, represents strong action taken by the government to tighten control over foreign loans and keep the national debt limit under control.

The information provided here is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.

Contacts

Nguyen Manh Cuong

Legal Director

cuong.nguyen@dfdl.com