As an international law firm operating in Tanzania, we are often asked to provide advice and work on transactions involving international lenders providing debt facilities to corporate borrowers in Tanzania. An issue which comes up regularly relates to the issuance of a debt record number (DRN) by the central bank, Bank of Tanzania (BoT). In this month’s finance update we look at what the registration process entails from a transactional perspective in order to clarify some of the confusion surrounding this issue.
Background for registration with BoT
Amongst Tanzanian corporates, raising debt finance through traditional bank lending on a bilateral or syndicated basis for business expansion or to meet working capital requirements is on the rise. We are seeing an increasing trend of borrowers approaching international banks and other offshore financial institutions, rather than domestic lenders, to meet their funding requirements. The two main reasons for this are (i) pricing and (ii) lending limits - the domestic loan market is more expensive and still developing its appetite for leverage.
Primarily, BoT has been entrusted with the responsibility of monitoring the issuance of foreign debt into Tanzania. The policy driver behind this role stems from the Government’s ambition to “ensure that the economy has the capacity to honour its debt obligations”. The message, therefore, is that the Government of Tanzania is willing to take steps forward to liberalise the Tanzanian economy with a view to stimulating growth in the private sector by allowing corporates to borrow from international banks and investors as long as the underlying transactions are closely monitored. It is worth mentioning that the Government has openly declared that any information collected in respect of foreign debt raised by the private sector is strictly used for statistical and analytical purposes and can only be published in aggregate form in order to preserve the privacy of individual borrowers.
What does a borrower and its commercial bank need to do to ensure the DRN is issued in a timely manner?
As highlighted above, it is important that a potential borrower begins the process of registering the loan with BoT as early as possible in order to avoid any potential pitfalls or delays with funding. With this in mind, it is prudent for a borrower to get in touch with their respective commercial bank’s relationship director to inform them of the terms of the debt package being offered by the international lender. This in turn allows the relationship director to begin discussions with their counterpart at BoT.
Whilst the commercial obligation rests with a borrower to ensure a DRN is obtained, the obligation to notify BoT sits with the borrower’s commercial bank. The primary responsibility for the commercial bank is to manage the registration process and liaise with BoT representatives. Most importantly, this will entail providing BoT with a copy of a fully executed and dated loan agreement. An original of the loan agreement is not necessary. The loan agreement should contain the following key information:
- name of the lender and borrower;
- contact details such as the postal address, fax number, telephone number, email address as well as the physical address of both the lender and the borrower;
- date of the loan agreement;
- currency of the loan;
- amount of the loan;
- purpose of the loan;
- interest rate to be charged to the loan;
- details in respect of the term of the loan and the final maturity date;
- the name and title of each signatory signing for and on behalf of the foreign lender;
- a repayment schedule detailing the amount(s) and date(s) for repayment of the principal amount of the loan and interest;
- a clause indicating applicable law governing the loan agreement; and
- details of the party responsible for paying withholding tax (if applicable).
It is important to note that as well as signing the loan agreement, there is a compulsory requirement for the borrower to affix a common seal. Prior to submission of the copy of the loan agreement to BoT, the document should also be attested by a notary public and commissioner of oaths. The lawyers negotiating the finance documentation for the borrower can carry out this attestation process for the borrower.
In addition to the loan agreement, a potential borrower is required to produce a short-form letter to its commercial bank formally instructing them to commence registration of the loan with BoT. A copy of this letter will also need to be submitted to BoT along with the rest of the documentation cited above.
FAQ with BoT
In order to seek further clarity on a number of points and to better advise our clients with respect to BoT’s registration requirements, we raised the below clarification questions with senior members of the debt management department at BoT. Please see the responses below to our queries.
Q. Please can you confirm how detailed the repayment schedule contained within the loan agreement needs to be? For example, is it an absolute requirement that each specific date, principal amount of the loan and interest amount to be applied needs to be clearly stated?
A. Yes – it is a requirement that each specific amount of either disbursement, principal repayment or interest payment with the respective dates must be clearly indicated in the loan agreement document. It may take the form of payment frequency (i.e monthly, quarterly, semi-annual or annually) or it may be presented in tabular form.
Q. Further to the above question, you will appreciate that sometimes it is just not possible to provide an exact number in the repayment schedule because the calculations and/or dates are influenced by changes to the interest rates or other commercial reasons. Therefore, can approximate figures be used instead?
A. Yes – realistic approximate figures or payment dates may be acceptable/used.
Q. Does BoT charge the local bank making the application for registration (for and on behalf of the borrower) a fee payable for obtaining the DRN? If so, how much is the fee?
A. No – absolutely no fee is payable for obtaining the DRN from BoT.
Q. Please can you categorically confirm whether or not any other debt instrument (except for a loan agreement) is required to be submitted by a borrower to BoT for registration purposes? For example, documents such as (i) letters of credit, (ii) guarantees and/or (iii) loan notes?
A. In as far as our mandate is concerned and for the purpose of issuing a DRN, only loan agreements containing all the information indicated above are required to be submitted by the borrower through its local commercial bank to BoT for registration.
DRN: Condition Precedent v Condition Subsequent to funding
From a transactional perspective, it will be of paramount importance to any international lender that the DRN is obtained immediately following execution of the loan agreement. We would also advise that the DRN be included in the loan agreement as a condition precedent (CP) to funding in order to reduce the risk of non-payment by a borrower. For this approach to work, it is crucial that the ground work for registering the loan with BoT is undertaken by the borrower’s commercial bank from the outset of the transaction. Based on our detailed discussions with BoT, we understand that a DRN can be issued following execution of the loan agreement and prior to the first disbursement of the loan, if the necessary documentation is submitted to BoT promptly following execution of the loan agreement.
If there is a time delay between execution and submission of the relevant documentation, BoT’s default position is to assume that the first disbursement has already been utilised by the borrower. The borrower would then be required to provide certified copies of bank statements as well as the SWIFT message evidencing receipt of the loan disbursement into its local account. If this happens, the international lender would have to get comfortable with waiving the DRN CP requirement to a condition subsequent.