The State Bank of Vietnam (SBV) is drafting a circular (Draft) to replace Circular 12 dated 31 March 2014 on conditions for enterprises to borrow foreign loans not guaranteed by the Government (Circular 12/2014). The Draft has some remarkable changes to the conditions of foreign borrowings by Vietnamese companies and credit institutions, and generally will tighten such conditions.

Limiting foreign loan purposes

1.         The Draft narrows down purposes where an enterprise can borrow a foreign loan. Specifically,

1.1.      For short-term foreign loans, an enterprise can borrow a foreign loan to repay short-term debts which will be due within 12 months from the signing date of the foreign loan agreement. However, such purpose excludes the repayment of (i) onshore loans with residents, and (ii) debts arising from purchasing securities for trading, acquiring capital contribution or shares of other companies, purchasing real estate for investment purpose or receiving the transfer of projects. It is not clear if the last exclusion refers to real estate projects only or any type of projects.

Circular 12/2014 currently does not impose similar restrictions. It just requires that the borrower cannot borrow short-term foreign loans for medium/long-term purpose. That means under the Draft, an enterprise cannot use short-term foreign loans for its business and production activities. It is not clear if the SBV intended to impose such restrictions.

1.2.      For long-term foreign loans, an enterprise can borrow foreign loans to (i) implement its investment project specified in its investment registration certificate (IRC) or in-principle investment decision, (ii) increase capital to serve its business and production activities, or (iii) restructure its existing foreign loans. A positive change relating to the last purpose is that the Draft removes the condition under which the borrowing expenses (chi phí vay) of the new foreign loan must not be increased as currently provided in Circular 12/2014.

The Draft however no longer allows a borrower to borrow foreign loans to implement business plan or project of its subsidiary as permitted under Circular 12/2014. It is not clear on the intention of the SBV for such removal.

Borrowing limitations

2.         The Draft introduces some new borrowing limitations as follows:

2.1.      For short-term loans of credit institutions,

2.1.1.   in 2023: the ratio between the total short-term foreign loans over its equity at the last business day of the immediately preceding year of credit institutions is restricted at 25% (except for foreign bank branches (FBBs) which is allowed to maintain the ratio at 100%);

2.1.2.   from 2024: the above ratio is reduced to 20% and 80%, respectively;

2.2.      For medium/long-term loans of credit institutions,

2.3.      the ratio between the total net disbursement of its medium/long-term foreign loans over its equity at the last business day of the immediately preceding month of commercial banks cannot exceed 10% for commercial banks, and 50% for non-bank credit institutions, foreign bank branches, cooperative banks, and policy banks;

2.4.      For medium/long-term loans of non-credit institutions, the total outstanding medium/long-term loans (both onshore and offshore) of the borrower cannot exceed:

2.4.1.   the difference between the total investment and the contribution capital as recorded in the in-principle investment decision or the IRC, if the purpose of foreign loan is to implement an investment project;

2.4.2.   3 times of its equity capital (or its charter capital if the equity capital is lower than the charter capital of the borrower), if the purpose of foreign loan is to increase capital to serve its business and production activities; and

2.4.3.   the outstanding principal and interest of the restructured loan, if the purpose of foreign loan is to restructure of an existing foreign loan.

Replacement of Business Plan

3.         The Draft replaces the production, business plan using foreign loan (phương án sản xuất, kinh doanh sử dụng vốn vay nước ngoài) (Business Plan) by the foreign loan use plan (phương án sử dụng vốn vay nước ngoài) (Use Plan). Other than borrowing to implement an investment project, it seems that the borrower is required to submit the Use Plan for all other borrowing purposes. A Use Plan must have some compulsory contents, i.e. (i) information of the borrower, (ii) borrowing purposes, (iii) scale of the borrowing capital, (iv) authority to approve the Use Plan, and (v) undertakings related to the Use Plan. These contents are much more detailed than what are required in a Business Plan under Circular 12/2014. However, a Use Plan does not need to cover the repayment ability of the borrower as in a Business Plan.

Maximum foreign borrowing expenses

4.         Unlike Circular 12/20214, the Draft will impose maximum borrowing expenses of a foreign loan as follows:

4.1.      8% per annum above the reference interest rate if the loan is denominated in foreign currency and uses a reference interest rate;

4.2.      8% per annum above 6-month SOFR Term Rate published by CME at the most recent time before signing date if the loan is denominated in foreign currency and does not use reference interest rate; and

4.3.      8% per annum above 10-year Vietnam Government Vietnam Dong bond coupon at the most recent time before the signing date if the loan is denominated in Vietnam Dong.

5.         The definition of borrowing expenses is also amended to include internal rate of return (tỷ lệ hoàn vốn nội bộ) and to exclude default rate, commitment rate applicable when the disbursement is not made, prepayment fee, fee for implementation of foreign currency derivative transactions or interest rate derivative transactions, and contractor tax. However, the Draft does not clarify what the internal rate of return means.

New FX hedging requirement

6.         The borrowers (other than those being credit institutions licensed to trade foreign exchange or to provide foreign exchange services or those having expected sufficient foreign currency source for repayment), are required to arrange the FX hedges for:

6.1.      a short-term foreign loan of more than USD 500,000. The FX hedges must be available on or before the disbursement date and must cover at least 30% of the disbursement amount; and

6.2.      a medium/long-term loan with each repayment instalment of more than USD 500,000. The FX hedges must be implemented at least 3 months before the repayment date and similar to short-term loans, the hedging value must be at least 30% of the repayment amount.

7.         The FX hedging requirement has immediate effect on the pending disbursement and outstanding repayment of foreign loans signed before the date the circular will take effect. Specifically, it will apply to (i) existing foreign short-term loans of more than USD 500,000 which have pending disbursement, and (ii) existing medium and long-term foreign loans which are subject to FX hedging requirement and still have outstanding principal.

New requirement on security asset realization organization

8.         The Draft introduces a new requirement that, if a foreign loan is secured by assets in the territory of Vietnam, the parties must use a representative organization for security asset realization (tổ chức đại diện xử lý tài sản bảo đảm) being a Vietnamese legal entity. This requirement does not apply if the securing party and the secured party agree to realize the security asset by way of taking over by the secured party in lieu of obligation performance. It is not clear on the reason behind this requirement. Further, the Draft does not clarify further when such arrangement must be established (i.e. upon borrowing the foreign loan or before the realization of the security assets).

This post is written by Nguyen Hoang Duy and edited by Hoang Thi Thanh Thuy.