The Wait is Over - Vietnam's New Offshore Loan Regulations Will Take Effect on 15 August 2023

The State Bank of Vietnam (SBV) has released its long-awaited circular No. 08/2023/TT-NHNN (New Circular) on conditions for borrowing non-governmental guaranteed foreign loans, replacing circular No. 12/2014/TT-NHNN with effect from 15 August 2023.

Despite banking community concerns that the revised lending regulations would significantly disrupt offshore lending, the final version of the New Circular is significantly less stringent than anticipated from earlier draft versions – perhaps recognising the significant role that offshore capital can play during such a turbulent economic landscape as is now being navigated. 

Borrowing Purposes 

1. The New Circular separately stipulates borrowing purposes for short-term loans and medium/long-term loans. In particular:
   
   
   1. Short-term foreign loans may be used as follows:
       
      1. restructuring existing foreign debts of the borrower (with no restriction on the tenor of the restructured debt, which seems to imply that short-term loan may even be used to refinance medium/long-term loans); or 
      2. paying short-term payables (excluding principal of onshore loans, which seems to suggest that financing interest payments may be permissible) arising from implementation of an investment project, business plan or other project of the borrower, and determined pursuant to applicable accounting regulations. 
         
         
   2. Medium/long-term foreign loans may be used as follows:
      
      
      1. restructuring existing foreign debts of the borrower; 
      2. financing implementation of the borrower's investment project; or
      3. financing implementation of a business plan or other project of the borrower. 
         
         
2. The New Circular no longer permits borrowing foreign loans for implementation of investment projects or business plans of an investee company of the borrower. This may have a significant impact on so-called "Holdco financings" in which a top level company would borrow funds to push down to the subsidiary level to fund the subsidiary's business plan or project. 
   
   
3. The New Circular expressly permits borrowing for implementation of an (a) "investment project", defined as a project issued with an investment license, and (b) "other project", which refers to any other project that does not fall within the definition of an "investment project". 
   
   Consequently, this formulation is broader than defined under recent iterations of the New Circular in draft form. While the New Circular remains silent as to whether equity injection (e.g., capital contribution or share subscription) is an acceptable purpose for incurrence of an offshore loan, this looser wording seems to imply that the SBV may be taking a more relaxed approach with respect to funding projects that are not specifically linked to investment licences, though this would still require further guidance from the SBV. 
   
   
4. The borrower is required to prepare a detailed plan for foreign loan usage or debt restructuring – requiring approval from the competent corporate body of the borrower (and adjusted if there are any changes) to justify the purpose of the foreign loan, except for borrowing to implement the borrower's investment project. If the loan needs to be registered with the SBV, such plan must be submitted to the SBV as part of the loan registration application. 

Borrowing Limits

The New Circular provides clarifications on the borrowing limits for each specific purpose. 

1. Implementation of business plans/projects: In keeping with current regulations, the total outstanding balance of all medium/long-term loans borrowed for implementation of a business plan or project must not exceed the borrower's internal requirements (as approved under the foreign loan usage plan). 
   
   
2. Implementation of investment projects: Under current regulations, the total outstanding balance of all medium/long-term loans must not exceed the total loan capital (being the difference between total investment capital and equity for implementation of the project as specified on the investment licence). Under the New Circular, only principal amounts (excluding interests and fees) of medium/long-term loans are counted towards this cap, which appears to provide greater flexibility. 
   
   
3. Restructuring existing foreign debts: The New Circular clarifies that the loan principal of the new refinancing loan must not exceed the aggregate of the outstanding principal, interests, fees of the loan to be refinanced, and fees of the new refinancing loan as determined at the restructuring date. This addresses ambiguity with respect to the condition that the new loan must not incur additional borrowing costs under current regulations. 
   
   Furthermore, in case of borrowing medium/long-term loans, the borrower must repay the refinanced debts within five business days upon drawdown of the refinancing loan, to ensure compliance with the borrowing limits under paragraphs (1) and (2) above, as applicable. This requirement is an improvement over current regulations as this timeline was not clear; and generally the SBV's interpretation was that the refinanced loan needed to be paid within the same day as drawdown of the new loan. 

VND-denominated Loans

Vietnamese law generally requires offshore loans to be disbursed in foreign currency, since VND-denominated loans are only permitted in limited circumstances (e.g., a foreign-invested company borrows money from its foreign shareholder’s profits which are distributed in VND, or the borrower is a micro-finance institution).

The New Circular now permits the parties to agree on a foreign loan denominated in VND, though disbursements and repayments are made in foreign currency at the exchange rate of a credit institution agreed by the parties. 

This will be a welcome change – in particular for a number of lenders expressing interest in synthetic VND-denominated loans.