Drafting on Offshore Loans Of Enterprises Without Government Guarantee.

On 12 May 2022, the State Bank of Vietnam (SBV) published a draft circular to replace Circular No. 12/2014/TT-NHNN on conditions for offshore loans of enterprises not guaranteed by the Government (the "Draft"). The Draft adds major new conditions for offshore loans ("OSL") and for borrowers, with the aim of tightening control over offshore borrowing.

The provisions of the Draft that most affect borrowing enterprises are:

1. Borrowing costs and the cap on borrowing costs

a. New definition of borrowing costs

The Draft adds the underlined parts below to the definition of foreign borrowing costs: "the total amount that the Borrower pays to the Lender, loan guarantors, loan insurers, agents and other related parties, expressed as an annual percentage of the loan amount, including the foreign borrowing interest rate, the internal rate of return, fees and other costs relating to the OSL, but excluding late payment interest, commitment fees for drawdowns not made as agreed, early repayment fees, fees for foreign exchange and interest rate derivative transactions, and foreign contractor tax."

b. Detailed cap on offshore borrowing costs

Under the Draft, the Borrower, the Lender and related parties agree the borrowing costs, but these may in no case exceed the cap:

For OSL in foreign currency:

• the reference rate (1) + 8% per year, if a reference rate is used; or
• the SOFR Term Rate (2) + 8% per year, if no reference rate is used.

For OSL in VND:

the Vietnamese government bond yield (3) + 8% per year.

Comments. These detailed rules may be the State's way of stopping borrowers from overstating loan-related costs as deductible expenses for corporate tax purposes.

This provision may affect enterprises whose actual and reasonable loan-related costs fall outside the definition of borrowing costs, or whose actual costs exceed the permitted cap.

2. New rules on the table of estimated foreign borrowing costs

Under the Draft, the Borrower must prepare a table of estimated foreign borrowing costs when it signs the offshore loan agreement and any amendments or supplements relating to borrowing costs. The table is used as follows:

For short-term OSL. The Borrower presents the table at each drawdown or repayment. The licensed credit institution that provides account services relies on the table to process the drawdown or the transfer to pay the Borrower's foreign borrowing costs, and provides it to the SBV on request.

For medium- and long-term OSL. The Borrower states its estimated foreign borrowing costs in the application to register the OSL, or to register a change to it, in accordance with the current rules on foreign exchange management for borrowing and repayment by enterprises.

3. Foreign exchange (FX) derivative transactions

Under the Draft, an FX derivative transaction becomes a mandatory condition for an OSL in the following cases (the conditions are underlined):

For short-term OSL. The rule applies to short-term OSL with a total loan amount above USD 500,000 or its equivalent in another foreign currency. The Borrower must enter into the FX derivative transaction on or before the drawdown date; the transaction value must be at least 30% of the drawdown amount; and the transaction term must match the repayment plan of the short-term OSL.

For medium- and long-term OSL. The rule applies to loans with principal repayments above USD 500,000 or its equivalent in another foreign currency. The Borrower must enter into the FX derivative transaction at least three months before the principal repayment date; the transaction value must be at least 30% of the principal repayment; and the transaction term must match the principal repayment plan of the medium- or long-term OSL.

These requirements do not apply (i) where the Borrower is a credit institution or a foreign bank branch licensed to trade in and provide FX services under current law, or (ii) where the Borrower expects to have enough foreign currency income to repay the loan.

A Borrower may skip the FX derivative transaction because it expects enough foreign currency income, but then lack enough foreign currency when the repayment falls due. If the Borrower proves that objective reasons delayed the foreign currency income from its production and business, the Borrower may buy foreign currency from a licensed credit institution to repay the loan, and must undertake to sell foreign currency back to that credit institution when it receives foreign currency from its production and business.

Comments. This provision aims to make enterprises routinely hedge their foreign exchange risk and to stabilise the foreign currency market and exchange rate management. However, it may also reduce the gains that borrowing enterprises could make from exchange rate movements.

4. Restrictions on the use of short-term OSL

The Draft adds restrictions on the use of short-term OSL. Short-term OSL may not be used to pay:

(i) debts arising from loan agreements with residents; and

(ii) debts arising from purchases of trading securities; purchases of capital contributions or shares in other entities; purchases of investment property; and acquisitions of projects.

5. Limits on medium- and long-term OSL

The Draft adds further limits on OSL. For OSL used to carry out an investment project, the Draft keeps the existing limit: the loan amount may not exceed the difference between the total investment capital and the contributed capital stated in the investment policy approval or the Investment Registration Certificate (IRC).

For OSL used to increase capital for the Borrower's lawful production and business. The Borrower must ensure that its outstanding medium- and long-term domestic and offshore loans (including the planned medium- and long-term offshore loans) do not exceed three times its equity under its latest audited financial statements at the time it signs the loan agreement, or three times its charter capital if its equity is lower than its charter capital.

For OSL used to restructure existing OSL. The maximum loan amount may not exceed the outstanding principal and interest of the OSL being restructured.

6. Transitional provisions

Enterprises should check the transitional provisions for their existing loans to make sure they continue to meet the legal borrowing conditions:

If a short-term loan agreement with a total loan amount above USD 500,000 (or its equivalent in another foreign currency) was signed lawfully before the new circular takes effect but has not been fully drawn down, the Borrower must enter into an FX derivative transaction to hedge exchange rate risk.

If a medium- or long-term loan agreement was signed lawfully before the new circular takes effect, has not been fully repaid and falls within the cases requiring an FX derivative transaction, the Borrower must enter into an FX derivative transaction to hedge exchange rate risk.

The Draft is still under discussion and open for comment, and no date has been set for its issue. If adopted, its changes will significantly affect enterprises in Vietnam that borrow offshore, so they should prepare in good time.

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(1) Reference rate: an interest rate calculated and publicly listed by one or more international organisations, which the Lender and the Borrower choose as the basis for the interest rate of a particular OSL.

(2) 6-month SOFR Term Rate: the rate published by CME on its official website, taken at the latest time before the signing of the loan agreement or of any amendment or supplement relating to borrowing costs.

(3) The yield of 10-year VND government bonds at the latest date before the signing of the loan agreement or of any amendment or supplement relating to borrowing costs.