The last few months have proved the recovery from the global financial crisis remains shaky. Political instability in Greece and unfavorable expectations for the euro increased the cautiousness of investors and reduced capital flows to developing countries. The effect of instability was felt by the majority of Ukrainian businesses linking their development plans with financing projections on international capital markets.
The majority of foreign investors who decided not to abandon their business opportunities in Ukraine have predictably shrunk the scope of unsecured investments (such as Eurobonds) and switched their priorities to secured lending in the form of syndicated loans and traditional bilateral loans. These instruments are also most frequently used by the international financial institutions (such as the IFC and EBRD) which are constantly present on the Ukrainian market.
Clarifications on cross-border loan registration procedures
Agreements providing for foreign-sourced loans to Ukrainian borrowers and amendments changing their essential terms (parties, loan amount, interest and charges, etc.) are subject to registration with the National Bank of Ukraine (the NBU). It should be noted that the procedure of crossborder loans registration is frequently criticized for being complicated and ambiguous. Therefore, the market has been constantly awaiting its liberalization.
On 27 April 2011, and several times thereafter, the Main Department of the NBU in the city of Kiev and Kiev Region (the NBU Kiev Department) issued letters (the Letter) clarifying requirements that apply to loan agreements with foreign lenders and the set of documents submitted with the NBU Kiev Department for registration. The main clarifications made by the NBU Kiev Department and their practical implications were as follows:
(i) Contractual provisions, which require resident borrowers to pay taxes accruing on incomes derived by foreign lenders under loan agreements, were prohibited. Although the Letter does not expressly prohibit tax gross-up provisions, in certain cases the NBU Kiev Department took a restrictive approach and refused to register loan agreements, which provided for tax gross-up;
(ii) The loan agreement signed by legal entities must bear the corporate seals of parties. In case the legislation of the foreign lender’s jurisdiction allows execution of contracts without affixing a seal, the NBU Kiev Department may require a formal confirmation from the lender referring to the relevant provisions of the legislation of such a lender’s jurisdiction. The letter is not clear as to the form of document serving such confirmation. Under the worst-case scenario, the NBU’s Kiev Department may require a legalized statement referring to applicable legislation of the lender’s jurisdiction certified by a notary or other certifying officer. To the best of our knowledge, this requirement urged certain foreign creditors to produce unauthorized stamps, which were used by their employees to certify all the documents signed in Ukraine;
(iii) The set of documents submitted for registration of the loan agreement must include copies of all documents, which are mentioned in the loan agreement and constitute an integral part (schedules, supplements, memoranda, etc.) of it. Apparently, the list of documents that can be required for registration is not narrowly worded, which allows substantial room for discretion by the NBU Kiev Department.
The Letter was issued to the banks located within the area of the NBU Kiev Department supervision (i.e., the city of Kiev and Kiev Region) and appears to be a recommendation rather than a set of new binding rules. However, it serves a good explanation of approaches taken by the NBU Kiev Department officers while reviewing documents submitted for registration, and is often treated as mandatory by the banks servicing loans with foreign lenders.
Despite the critics towards the cross-border loan registration procedure it has not been simplified by the Letter and, in some cases, it has become even more complicated.
Recent changes in the registration procedure
On 15 June 2012, the Board of the NBU adopted Regulation No.246 introducing amendments (the Amendments) to the crossborder loan registration procedure. The Amendments shall come into force on 10 November 2012. The Amendments provide, inter alia, that:
(i) The borrower, which is not a bank, shall not apply directly to the NBU for registration of a loan agreement with a foreign lender. Instead, the documents required for NBU registration will need to be submitted by the borrower to its loan servicing bank. The required set of documents includes (i) a hard copy standard-form notice on the loan agreement (the Loan Notice), (ii) the loan agreement (together with other additional agreements and documents related to its fulfilment and exercising currency exchange operations there under) and (iii) a copy of the receipt evidencing payment of the NBU registration fee. It should be noted that the Amendments do not provide for the possibility of submitting a notarized copy of the loan agreement for registration. Thus, parties to a loan agreement (amendments thereto) may need to ensure there is always an extra original for the purposes of compiling the set of documents for the NBU registration;
(ii) The set of documents must be reviewed by the loan servicing bank. The loan servicing bank has 4 business days to review the set of documents and approach the NBU for registration of the loan agreement or return the documents to the borrower for further changes in the relevant documents;
(iii) The NBU is required to register the cross-border loan agreement on the basis of the electronic versions of documents received from the servicing bank, namely: (i) the Loan Notice confirmed by the servicing bank and (ii) the servicing bank’s formal undertaking to service the transactions contemplated by the loan agreement. Notably, this list is not exhaustive since the NBU is entitled to require from the loan servicing bank any additional information it may deem necessary for the purposes of registration;
(iv) The Amendments have cancelled the 7-business day term for the NBU registration and the amended procedure does not provide even for an indicative registration term;
(v) The registration of the loan agreement will no longer be evidenced by a loan registration certificate. Instead, the NBU shall issue a hard-copy Loan Notice with the NBU’s stamp confirming the registration.
Depending on the NBU’s implementation practices the Amendments could substantially modify the cross-border loan registration procedure by partially shifting control over the registration from the NBU to servicing banks. However, it remains to be seen whether the regulator is ready to limit the broad discretion granted to it under the Amendments.
New regime of surety payments
The risks arising from volatility on international capital markets and increasing uncertainty urges the creditors to seek additional comfort in multi-fold security structures. Nowadays, one can hardly imagine a typical cross-border financing structure without sponsor guarantees or surety ships granted by the borrower’s Ukrainian affiliates.
On 25 July 2011 (effective as of 5 September 2011), the NBU adopted a long-awaited amendment (the Amendment) to the Regulations enacted by NBU Resolution No.266 of 17 June 2004, pursuant to which payments by Ukrainian sureties to foreign lenders in connection with loans provided to Ukrainian borrowers were exempted from the NBU licensing regime (the Exemption) which previously required the receipt of an individual NBU license for each such payment. The Exemption applies if such payment is made to fulfill a Ukrainian borrower’s obligations under a loan agreement registered by the NBU. The licensing regime for the surety payments was, in fact, introduced by the NBU in accordance with its formal clarification letter of 15 November 2010. In its letter, the NBU explained that in order to make a payment to a foreign lender a Ukrainian surety had to obtain an individual license from the NBU unless the surety was an authorized bank or financial institution.
Despite liberalizing the regime of payments under the residents’ sureties the NBU still requires the acquisition of individual licenses for fulfillment of surety obligations under the liabilities of non-residents. This affects standard Ukrainian Eurobond transactions, which are most frequently structured to include foreign holding companies acting as lenders to convey the relevant Eurobond issuance proceeds to their Ukrainian affiliated entities. Another restriction under Ukrainian law is the moratorium on purchasing foreign currency for making surety payments. Notably, this restriction applies to sureties obligations under the loans of local and foreign borrowers. Accordingly, all payments under suretyships can be made only from the sureties’ own hard currency funds.
Both past and ongoing crossborder financing deals have revealed some significant gaps in applicable currency regulations. Overcoming these gaps would require certain modifications of the regulatory framework raising the competitiveness of Ukrainian companies on international capital markets. However, so far there have been no signals from the NBU to promise introduction of the necessary changes in the near future.