The State Bank of Vietnam (SBV) recently released a draft circular (the Draft Circular) which would replace Circular No. 12/2014/TT-NHNN on conditions for borrowing offshore loans by enterprises without government guarantees promulgated on 31 March 2014. The Draft Circular appears designed to tighten control of offshore loan borrowing which has been rapidly increasing in recent years, in particular with respect to sectors considered to be potential bubbles such as share-backed financings and M&A in the real estate sector.
Whilst a number of provisions introduced by the Draft Circular – such as mandatory currency hedging requirements – will likely make some offshore lenders' credit committees sleep better at night, other provisions such as an 8% borrowing cost cap will be difficult for credit funds and mezzanine lenders to accept. As with many newly introduced laws in Vietnam (in particular those in sensitive areas such as banking and finance), solving for one problem often gives rise to several others, in particular as policies with respect to foreign lending and investment laws are often intertwined though subject to the authority of different regulators. The release of the Draft Circular for comment is only the beginning of what may be a lengthy iterative process involving stakeholders in which the proposals will be transformed into actual law.
Offshore Borrowing Caps
Borrowing short-term offshore loans is now limited to borrowing for repayment of short-term debts payable during the 12-month period after signing the offshore loan agreement. However, short-term offshore loans under the Draft Circular may not be provided for the purpose of refinancing onshore loans, buying securities, acquiring shares, making real estate acquisitions and financing M&A transactions for the transfer of projects.
The Draft Decree also imposes additional limits on borrowing medium and long-term loans as follows:
- implementing an investment project for which an investment registration certificate or an in-principle approval is issued (which practically makes this prong almost exclusively limited to land development projects),1 in which case the total medium and long-term loans borrowed to implement the project must not exceed the loan capital registered in the investment registration certificate/in-principle approval;
- supplementing capital for business operation consistent with the borrower's registered business lines, and the total of medium and long-term loans of the borrower must not exceed three (3) times the equity/charter capital of the borrower; and
- refinancing existing offshore loans, in which case the medium or long-term loan to be borrowed must not exceed the outstanding principal and interest of the existing loan to be refinanced.
Whilst the SBV is clearly looking to reduce the impact of speculative bubbles imploding with knock-on consequences to credit markets, these limits will inevitable create some challenges given that most domestic companies that are not majority foreign owned are no longer required to obtain investment registration certificates to carry out their projects. A potential consequence could be that domestic companies may prefer to seek investment registration certificates for their projects (even if not required under law) which may create backlogs with local regulators. In the absence of many local projects having investment registration certificates, many offshore loans will fall under paragraph (2) above and be subject to the equity ratio test.
Borrowers being credit institutions or branches of foreign banks are further subject to offshore borrowing limits. As of 2023, the outstanding short-term loan obligations must not exceed 25% of total equity for credit institutions and 100% for branches of foreign banks. These ratios are lowered to 20% and 80%, respectively, in 2024. In addition, the net drawdown of medium and long-term loans during a calendar year must not exceed 10% of total equity for commercial banks and 50% for non-banking credit institutions.
Ceiling on Costs of Borrowing
The Draft Decree has further detailed the definition of costs of borrowing to clearly identify which costs are included and excluded from borrowing costs. In particular, interest and IRR linked payments, and other related fees and costs are included within the borrowing cost whilst commitment fees, prepayment fees, default interest, exchange rate hedging costs, interest rate derivative and foreign contractor tax are excluded.
The Draft Decree also imposes a ceiling on the costs of borrowing in a foreign currency:
- reference rate + 8% p.a., if there is agreed reference rate; or
- 6-month CME Term SOFR Rate + 8% p.a., if there is no agreed reference rate.
For borrowing in VND, the cost is capped at the government bond VND interest rate for a 10-year term + 8% p.a.
Commercial banks and development finance institutions are unlikely to be perturbed by these conditions. However, private credit funds and mezzanine lenders, who appear to be gravitating towards Vietnam as a market in recent years, may well be excluded from participation in many financings since the interest rate caps are below their IRR expectations. This ceiling will result in increased attention to loan structuring with the use of onshore/offshore transactions favoured to skirt this new ceiling on borrowing costs, and gaps in expectations with respect to interest rate and IRR returns may be offset by higher fees (which as noted above are excluded from the borrowing cost).
Foreign Exchange Rate Hedging
From our recent discussions with a number of lenders, the proposed new currency hedging requirement under the Draft Circular is welcomed as currency mismatch between VND revenue and USD denomination of offshore loans was consistently a risk identified by credit committees, in particular given limited currency hedging products available in the Vietnam market.
Under the Draft Circular, borrowers are required to conduct foreign exchange rate hedging for loan amounts exceeding USD 500,000. Borrowers that are credit institutions licensed to provide foreign exchange services or enterprises projected to have sufficient income in foreign currency for repayment of the loan are exempt. Borrowers must hedge risk by covering at least 30% of the credit balance.
We note that unlike other provisions of the Draft Decree, this is intended to apply to existing drawn loan facilities which practically will create challenges in particular where new credit institutions providing hedging products may expect to accede to security documents and share pari passu in security and voting rights. As a practical matter, Vietnamese regulations have long been silent on whether foreign credit institutions are able to provide hedging for their own loans (though in practice this is addressed through fixed rate loans). In order to implement this requirement, hedging regulations will also require a significant overhaul.
Requirement for Security Agent
For secured offshore loans, the Draft Decree now requires that the parties must appoint an onshore licensed credit institution or branch of a foreign bank or other institution incorporated under the laws of Vietnam as the security agent, unless the parties agree for the lender to enforce the security by taking over the secured asset in its own name. We do not see this as a change that will have significant impact as most offshore lenders elect to appoint a security agent in any event, though this may incur additional costs and administrative burdens for the in transactions where there is only a single lender.
1 Many investment projects that do not involve land use rights acquisition do not require an investment registration certificate or in-principle approval, unless they are owned by foreign-invested companies.