Ukraine: National Bank of Ukraine tightens control over cross-border loans

Changes in the procedure for registration of loan agreements became effective as of 1 January 2008.

1. Background

Ukraine’s central bank (the National Bank of Ukraine or NBU) has amended its regulation on registering cross-border loans. The main purpose for the requirement to register such loans is to control capital flight from Ukraine by, inter alia, monitoring the payments of interest and other fees under cross-border loans. In 2004, the NBU introduced a cap on the amount of interest and all fees payable under a cross-border loan agreement. The latest amendments are intended to clarify certain provisions of the regulation. However, not all of the new amendments are clear and it remains to be seen how the NBU will implement the amendments in practice.

The principal document that addresses the granting of loans in foreign currency to Ukrainian residents by non-residents (and the granting of loans in foreign currency by Ukrainian residents to non-residents) is the Resolution of the National Bank of Ukraine No 270, dated 17 June 2004 (“Resolution No 270”).

Last year the NBU issued Resolution No 235, dated 22 June 2007 (“Resolution No 235”) and Resolution No 350, dated 27 September 2007 (“Resolution No 350”) according to which Resolution No 270 has been amended and restated. Both Resolution No 235 and Resolution No 350 became effective on 1 January 2008. [1]

Resolution No 270 stated that the interest rate payable under loan agreements may not exceed the NBU's maximum interest rate cap (the “Cap”). According to the Resolution of the NBU No 363, dated 03 August 2004 (“Resolution No 363”), the following Caps were introduced (which may be changed in the future in accordance with Amended Resolution No 270):

• 9.8 % per annum, for fixed-rate loan agreements with a maturity up to 1 year;
• 10 % per annum, for fixed-rate loan agreements with a maturity from 1 to 3 years;
• 11 % per annum, for fixed-rate loan agreements with a maturity in excess of 3 years; and
• 3-month USD LIBOR plus 750 basis points for all floating rate loan agreements.

The Cap covers the interest, all commissions, penalties (e.g., default interest) and other charges set out in the respective loan agreement. Resolution No 270 further provides that, upon the early repayment of a loan (e.g., as a result of acceleration or a voluntary prepayment by a borrower), the interest rate may not exceed the Cap applicable to loans with a maturity period corresponding to the term of the loan as shortened by early repayment.

Starting from 1 January 2008, Amended Resolution No 270 introduced the following amendments to the procedure for granting loans in foreign currency, the most significant of which concern:

(i) the general provisions regarding granting of loans;

(ii) the procedure for issuing registration certificates regarding such loan agreements; and

(iii) the supervisory role of servicing (account) banks.

2. Main changes

The Cap

The amendments which banking and finance lawyers were most concerned about are those connected with the procedure for determining the Cap. According to the amendments to Resolution No 270 introduced by Resolution No 235, the Cap would have been determined by the NBU semi annually as follows:

For agreements in foreign currency from “the first group of the Classifier” (including Euros, US dollars and Sterling), the Cap is equivalent to the average yield on Ukrainian sovereign bonds in US dollars plus two per cent. For the time being this is approximately 8.5 per cent per annum.

However, the abovementioned procedure for determining the Cap was cancelled by the NBU before the resolution became effective. The NBU has changed its position based on the following rationale: such procedure would result in a decrease in the financing of Ukrainian entities. Resolution No 350 introduced the latest amendments to Resolution No 270 and stated, inter alia, that the Cap should be determined in accordance with the value of state borrowings on external financial markets. In fact, the NBU recalled the procedure set out in the previous Regulation No 270.

For the time being the NBU is continuing to apply the Cap set out in Resolution No 363 (see Section 1 (Background)). Should the NBU change the amount of the Cap, it is obliged to inform its territorial offices and authorised banks of such changes no later than one month prior to the date when such changes will become effective.

Requirements to wording of agreements

Amended Resolution No 270 states that a loan agreement executed by and between a foreign lender and a Ukrainian borrower should contain a provision stating that, during the validity of the agreement, the amount of payments under the agreement should not exceed the Cap indicated in the registration certificate issued by the NBU in connection with that agreement.

Furthermore, Amended Resolution No 270 establishes a new rule, which has been applied by the NBU for a long time in practice, according to which any amendment agreement to a loan agreement, which is subject to registration with the NBU, must provide that it becomes effective only after its registration with the NBU. Previously, Resolution No 270 provided for such a rule only in respect of actual loan agreements, but not amendments.

EBRD exception

The provisions of Amended Resolution No 270 relating to the Cap and the time at which a loan agreement comes into force do not apply to loan agreements between Ukrainian residents and the EBRD.

Amended notification form

In order to receive a registration certificate, a borrower-resident submits to the NBU, inter alia, a notification regarding the loan agreement, the form of which has been changed according to Amended Resolution No 270. From 1 January 2008, such notification should specifically address the amount of interest, default interest, commitment fees, agency fees, legal fees and all other fees to be paid under the loan agreement.

Information about suretyships/guarantees

From 1 January 2008, a borrower registering a loan agreement with the NBU shall be obliged to inform the NBU of any surety that issues a suretyship to secure the borrower’s obligations under the loan agreement (item 18 of the application form). Previously, borrowers were obliged to inform the NBU of guarantors only.

Extended power of the NBU

Amended Resolution No 270 essentially extends the powers of the NBU to demand additional documents from a borrower and to check documents already submitted according to which a registration certificate has been already issued. In addition, the NBU is now entitled to review and cancel a registration certificate which has already been issued if there is misleading information in the documents provided by the borrower according to which the registration certificate was issued.

More control duties of an account bank

The amendments that worry servicing banks most are those that impose an obligation on a servicing bank to: (i) check the set of documents that are to be submitted by the borrower–resident to the NBU for the registration of the loan agreement; and (ii) confirm the compliance of such documents with the terms and conditions of the loan agreement. The notification to the NBU mentioned above in the Section “Amended notification form” must be stamped by an account bank. The attachment of a stamp would serve as confirmation from the account bank that the information set forth in such notification was in full compliance with the terms and conditions of the loan agreement.

Furthermore, according to Amended Resolution No 270 an account bank is obliged to control funds payable to the lender under a guarantee (suretyship) against the payment obligations of the borrower–resident secured by such guarantee (suretyship). If the guarantor (surety provider) and the borrower use the services of different banks, the guarantor’s bank will be obliged to notify the borrower’s bank of any funds transferred to the lender–non-resident within a week following such transfer.

[1] For the purposes of this article Resolution No 270 as amended and restated by Resolution No 235 and Resolution No 350 is hereinafter referred to as “Amended Resolution No 270”.