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New FX legislation in Ukraine: a hands-on guide for international lenders
Kinstellar, Kyiv, Ukraine,
Wed, Feb 6, 2019
February 2019 – From 7 February 2019, the Law of Ukraine on Foreign Exchange and Exchange Transactions (the “FX Law”) is in effect. Adopted by the Ukrainian parliament on 21 June 2018, the FX Law overhauls the existing exchange control regime, introduces the principle of freedom of foreign exchange transactions and vests the National Bank of Ukraine (the “NBU”) with a complete arsenal of exchange control tools, including those that earlier applied based on the law and not the NBU regulations.
According to the transitional provisions of the FX Law, the NBU was required to bring its regulations into compliance with the FX Law and also to adopt regulations on contingency exchange control restrictions that will start to apply simultaneously with the FX Law. These contingency restrictions will remain in place until Ukraine improves its macroeconomic condition, tightens its control over non-banking financial institutions and adopts BEPS-related legislation.
In line with the FX Law, on 4 January 2019, the NBU published a suite of regulations dated 2 January 2019 that will enter into the effect together with the FX Law on 7 February 2019. While some of the earlier existing restrictions were essentially repackaged, the NBU did change significantly its regulation for cross-border credit transactions between Ukrainian borrowers and non-Ukrainian lenders as discussed below, in particular by abolishing the loan registration procedure.
From 7 February 2019, loan agreements between international lenders and Ukrainian borrowers that were signed and registered before the FX Law enters into effect will no longer be subject to the earlier regime, otherwise than as a result of contractual provisions driven by the previously applicable regulation. There may be situations where either party to a loan agreement or both may wish to revisit their contractual arrangement to allow greater flexibility to the parties going forward.
Parties are free to select the effective date
Loan agreements (as well as amendments to them) may enter into effect on the date of their signing or on any other date agreed by the parties to such agreements. It is no longer necessary to have the loan agreement registered with the NBU as a condition for its entering into effect. Under the new regulations, all that is required is for the local account bank of the Ukrainian borrower to enter the loan agreement into the NBU’s electronic system no later than the day of the first disbursement under the agreement. This development is particularly welcome in the context of loan participation note (LPN) structures. In the absence of the previously required loan agreement registration process, the managers no longer run the risk of losing investors because of the delay between the bookbuilding and the issuance of notes that could have led to a change of circumstances affecting the pricing of the notes.
Limitation on cost of borrowing cancelled
In the past, at the time of the registration of a loan agreement, the NBU would verify whether the amount of all payments due by the borrower under the loan agreement, including all lender's fees, exceeds the amount calculated by reference to the 'maximum interest rate'. The maximum interest rate most recently ranged from 9.8% to 11% per annum. The NBU would turn down a registration application if the cost of borrowing under the loan agreement would exceed, e.g. 11% of the principal amount of a loan maturing in more than three years from the date of disbursement.
The new regulations introduce a more flexible approach. When processing a payment under a loan agreement, the borrower's account bank would need to review that the cost of borrowing is in line with market rates.
Limitation on recoverable amounts cancelled
The new regulations cancel the requirement that loan agreements involving a Ukrainian borrower contain a clause that contractually limits the lender's ability to recover, in relation to loan utilisation costs, an amount exceeding the disbursed principal multiplied by the applicable maximum interest rate. In situations of a borrower's default, in the past lenders had to rely on indemnities available from non-Ukrainian obligors to recover funds above the previous statutory limit.
Payment of lenders' fees
Under the earlier applicable regulations, any fee charged by a lender for making a loan available to a Ukrainian borrower (including commitment fees and front-end fees), whether set out in the loan agreement itself or in any other agreement between the parties, would be counted for the purpose of the maximum interest rate test as described above. From 7 February 2019, a Ukrainian borrower can pay the fees to the lender in an agreed amount whether under a loan agreement or a fee letter as long as the borrower's account bank is satisfied that the lender's fees are in line with the market.
All cross-border loans may be prepaid at any time
In March 2014, in the wake of the political and economic crisis in Ukraine, the NBU prohibited the prepayment of cross-border loans, including upon acceleration. Since that time, the NBU has gradually released most of the legitimate arms-length cross-border loan transactions from the scope of this prohibition. From 7 February 2019, a Ukrainian borrower will be able to prepay any loan made available by a non-resident, including an affiliate company.
Accumulation of FX funds for future payments
Under the new regulations, a Ukrainian borrower is allowed, within the term of a loan agreement, to accumulate funds in a foreign currency on a dedicated Ukrainian account for the purpose of future payments under the loan agreement. As a result, borrowers are now able to take advantage of favourable exchange rates and, to certain extent, hedge their foreign exchange risk. Under the new regulations, funds in these accounts can only be directed to payments under the loan agreement or exchanged back to Ukrainian currency. Lenders may also benefit from these new rules by creating a charge over these accounts or by using them as debt-service reserve accounts.
Co-borrowers still borrow their own tranches
Similar to the previously applicable legislation, when a loan agreement provides for a co-borrowing structure, Ukrainian banks are required to make an entry in the NBU system in relation to each co-borrower that indicates 'the portion of the credit facility available to that co-borrower'. The new regulations maintain the restriction on Ukrainian banks that prevents them from processing any payment by a co-borrower representing a repayment of the loan principal if the amount exceeds the amount indicated in the NBU system.
Co-borrower may repay the entire loan facility
As discussed above, co-borrowers are not permitted to each borrow 'up to the full amount of the credit facility'. The new legislation, however, allows for a contractual clause entitling a co-borrower under a credit facility agreement to repay all loans made available to it and any other co-borrower(s) under the agreement.
Non-residents may lend in UAH
New legislation allows non-residents to open current accounts in Ukrainian currency and to use such accounts to make loans in Ukraine. Alternatively, a lender via its non-Ukrainian bank may use its UAH-denominated correspondent account with a Ukrainian bank for the same purposes. Ukrainian law continues to prohibit reverse cash flow though, i.e. Ukrainian entities are not permitted to make loans in UAH to non-residents.
Mandatory sale of loan proceeds remains in place
The new FX legislation continues to require Ukrainian borrowers (other than banks) to exchange 50% of their foreign currency loan proceeds for Ukrainian currency, unless an exemption applies. The NBU has recently announced at an official briefing meeting, however, that this percentage may be reduced to 30% with effect from 1 March 2019.
Use of foreign accounts
In the past, the NBU allowed a Ukrainian borrower to collect loan proceeds in an account outside Ukraine to the extent the borrower obtained a permit from the NBU (referred to as an 'individual license') to credit such account with an amount not less than the proposed amount of disbursement. Within the new framework, cross-border payments out of Ukraine no longer require an individual license from the NBU. However, while the NBU has declared the freedom of use of foreign accounts by Ukrainian companies, the new legislation may be read to suggest that a loan to a Ukrainian company may be disbursed only to its Ukrainian account and only then transferred to its offshore account, subject to the applicable limitations.
Payments under corporate guarantees
From 7 February 2019, Ukrainian law continues to treat payments by Ukrainian corporate guarantors (usually referred to in Ukrainian deals as sureties) differently, depending on whether the respective borrower is registered in Ukraine or not. Guarantee payments in relation to a Ukrainian borrower's loan may be made in an amount agreed in the transaction documentation. Guarantee payments in relation to a non-resident borrower's loan are processed by Ukrainian banks, provided that such payments do not exceed (when aggregated with any payments by such guarantor that may not be made freely) EUR 2,000,000 per calendar year, unless an exemption applies.
For more details, please contact Andriy Nikiforov, Counsel, at andriy.nikiforov@kinstellar.com.