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New Developments for Cross-Border Restructuring
In recent years, debt restructuring ruled the Ukrainian finance market. However, strict and outdated currency control, accompanied by a bunch of anti-crisis measures, as well as numerous gaps in Ukrainian security laws, made the debt restructuring complicated, particularly for prudent foreign lenders. As a result, foreign lenders sought to cover increased risks by tightening undertakings in loan agreements, taking additional security and involving non-resident companies related to Ukrainian borrowers as guarantors/security providers.
In February 2019, Ukraine started living in a new legislative environment aimed at FX market liberalization and enhancement of creditors rights. The new currency framework introduced the “everything is allowed, unless expressly forbidden” principle vs the former “everything is forbidden, unless expressly allowed” principle for cross-border transactions, which would definitely give the parties more efficiency and more flexibility when negotiating the terms and conditions of restructuring.
No Registration with NBU and No Caps — Really?
The requirement to register cross-border loans with the National Bank of Ukraine was cancelled. Instead, servicing banks should notify the NBU about loan agreements before effecting any transactions thereunder. Within the notification process, submitting the underlying agreement and the supporting documents/information to the servicing banks would be required and the making of any cross-border payments would not be possible in the absence of the relevant entry in the electronic system. Given this, in practice foreign lenders would still require evidence of notification as a condition precedent to disbursement of funds or to the effectiveness of a restructuring to Ukrainian borrowers.
The new rules also cancelled the NBU maximum interest rate cap under cross border loans. Ukrainian servicing banks are, however, required to monitor whether payments under cross-border loans are at arm’s length. According to the NBU’s guidelines, servicing banks should take into account the following indicators:
(a) The cost of financing, established on world markets (e.g., LIBOR, loan rates of central banks of other countries, where the lender is registered, etc.);
(b) The margin, which should correspond to the sovereign risk rate of Ukraine and the individual risk rate of a particular borrower; and
(c) Interest rates under sovereign Eurobonds of Ukraine (for intra-group loans).
The list of indicators is neither exhaustive nor obligatory, and Ukrainian servicing banks can introduce their own indicators. Ukrainian servicing banks can request additional documents/information from the parties to a loan agreement to prove that the cost of funds under a loan is competitive. Such wide discretion of servicing banks may create uncertainty for both a bank and a foreign lender. When entering into cross-border restructurings involving changes to interest rates and introducing other payments under the loan agreement, the parties should consider discussing such changes with the servicing banks in advance in order to avoid delays or bans for making cross-border payments under the restructured loan.
Among the other notable developments is the cancellation of the ban on prepayment under cross-border loan agreements. Lenders have an option to accelerate or require their borrowers to pre-pay a portion of the loan as a starting point in further negotiations on restructuring the loan.
According to the new regulations, borrowers can purchase and accumulate foreign currency on their bank accounts for servicing debt under cross-border loans for the entire term of the loan and use cash sweep mechanics to discharge their debts. Previously, maintenance of FX debt service reserve accounts was practically unfeasible, and cash sweep did not work.
The regulator presented a new hedging instrument on the currency derivatives market in Ukraine. Ukrainian residents are now allowed to enter into non-deliverable forward contracts through banks for hedging their currency risks under cross-border loans. There is no doubt that hedging currency risks under loan agreements would minimize FX risks in cross-border restructurings which, in its turn, would likely reduce the costs of funds for Ukrainian borrowers.
Because Ukrainian legislation is still missing a number of fundamental concepts such as “close-out netting” and “single agreement,” further changes to Ukrainian regulations are required to encourage the market participants to use new instruments.
Enforcement of Security — What’s New?
The good news is that individual licences issued by the NBU are no longer required in order to make cross-border payments. Instead all cross-border payments are limited to EUR 2 million per year (in equivalent), unless exceptions apply.
In particular, payments under loan agreements and security documents (as well as guarantees/suretyships) are now excluded expressly from the above limits. We note that previously repatriation of proceeds arising in the course of enforcement of Ukrainian security documents and cross-border payments under guarantees/suretyships securing offshore debt were subject to licensing and a cap in the amount of USD 50,000 per month (in equivalent).
In addition, non-residents are now allowed to open and maintain current accounts in Ukrainian banks (in both UAH and foreign currency). Such accounts may also be used for accumulating UAH proceeds received from enforcement of security in Ukraine (for example, mortgages), conversion of such funds into FX and transfer beyond Ukraine. Previously, a foreign lender had to involve a Ukrainian agent for such purpose.
Significant changes have been introduced by the new Law On Amendments to Certain Legal Acts of Ukraine on Resumption of Lending which was enacted on 4 February 2019 (the “Law”) resulting in overall strengthening of protection of creditors’ rights.
For example, previously the liquidation of the borrower was often used by unfair borrowers to terminate the surety, pledge or mortgage by third parties and consequently avoid repaying a debt. According to recent legal changes, the liquidation of the borrower would not terminate the security granted by a third party security provider, if the creditor had filed a claim against the surety/pledgor/mortgagor before the record of liquidation of the borrower has been entered into the register of legal entities.
Cross-border restructuring normally involves an amendment of the main parameters of the loan, which may result in an increase in the principal debtor’s obligation. According to the new rules, suretyship will no longer terminate because of the increase in the debtor’s obligation (amount, term, interest rate, fines) without the surety’s consent. In such cases, the surety continues to be liable in the amount that existed until the date of increase of the obligation secured by that surety.
At the same time, the deadline for filing claims by creditors to the surety have been extended from six months to three years from the maturity date under the principal obligation, unless a fixed suretyship term is set out in the agreement. Failure to file a claim within the above deadline will result in termination of the suretyship.
The rights of the creditor in the process of foreclosure of mortgaged property have been strengthened significantly. Previously, in case of extrajudicial foreclosure of mortgaged property, all further claims of the mortgagee to the debtor ceased to be valid, even if after such foreclosure a significant portion of the loan remained unpaid. This is no longer the case.
No Dealings with Shady Jurisdictions
The NBU has introduced a number of restrictions to fight outflow of funds to the Russian Federation and non-AML compliant countries. Thus, the NBU prohibited Ukrainian residents (save for banks) to perform cross-border transactions with jurisdictions which meet any of the following criteria (the “Restricted Jurisdiction”):
— the jurisdiction is included on the “offshores” list (Guernsey Island, Jersey Island, Island of Man, Belize, Andorra, Gibraltar, Monaco, Aruba, Bahamas Islands, Barbados, Bermuda Islands, British Virgin Islands, US Virgin Islands, Grenada, Cayman Islands etc.; or
— the jurisdiction is considered as an Aggressor-State under Ukrainian law; or
— the jurisdiction fails to comply or unduly complies with recommendations of international, intergovernmental organisations in the sphere of anti-money laundering and combating the financing of terrorism (AML/CFT) (Iran, the Democratic People’s Republic of Korea); or
— the jurisdiction has AML/CFT strategic deficiencies according to FATF (the Bahamas, Botswana, Cambodia, Ethiopia etc.).
The list of prohibited cross-border transactions includes:
— transfers of funds to accounts at banks registered in a Restricted Jurisdiction;
— purchase of any investment objects in a Restricted Jurisdictions, or if the seller of such investment object is registered/domiciled in the Restricted Jurisdiction; and/or
— provision of cross-border loans to non-residents, registered/domiciled in a Restricted Jurisdiction (save for consumer loans by Ukrainian banks in UAH to individuals).
New Insolvency Rules
In October 2019 a new Bankruptcy Code (the Code) will come into force. The Code is aimed at improveming the bankruptcy legal framework in Ukraine and enhancement of creditors’ position in bankruptcy proceedings of their debtors. Among major novelties are the following:
— introduction of bankruptcy procedure for individuals (previously bankruptcy of individuals was not possible, save for the bankruptcy with respect to entrepreneurs);
— cancellation of requirement to the minimum amount of the monetary claim necessary to initiate bankruptcy proceeding by the creditor;
— increase of the hardening period from 1 to 3 years;
— introduction of new rules for liability of debtor’s management; and
— enlarging the scope of creditors’ rights in the course of the bankruptcy proceedings of the debtor, etc.
There is no doubt that recent legal developments are remarkable and open up broad access for Ukraine to international financial markets. It’s expected that the new rules would reduce the level of risk associated with Ukrainian borrowers and with making transactions in Ukraine. As a result, foreign lenders would be more willing to proceed with the restructuring negotiations without placing additional burden on Ukrainian borrowers, while Ukrainian borrowers would be encouraged to play fairly and diligently without relying on various instruments whose aim is to avoid paying debts.