On 10 April 2017, the Resolution of the National Bank of Ukraine (NBU) No. 26 dated 23 March 2017 amending the Regulation of the NBU No. 270 dated 17 June 2004 on the procedure for borrowing of foreign currency loans by Ukrainian residents from non-residents, came into effect. The Resolution overhauls the process for registering a loan agreement between a Ukrainian borrower and a non-Ukrainian lender by the NBU, which is a prerequisite for such a loan agreement to become effective, subject to a few exceptions. The Resolution essentially opens the way for the development of a secondary market in respect of loans issued to Ukrainian borrowers.
New process for loan amendment registration
Under the previous procedure, only borrowers were entitled to file for the registration of an amendment to an existing loan agreement and, unsurprisingly, often used this requirement to their advantage to negotiate better terms in the course of the loan assignment. Under the new rules, the lenders may, in most instances, control the filing for the registration of a loan amendment.
However, the new process is not without its flaws. Ukrainian banks will continue to act as intermediaries between non-Ukrainian lenders and the NBU for registration purposes. If the borrower is a Ukrainian bank (and in this instance it would also be the loan supervising bank), the existing lender and the new lender would still need to rely on the cooperation of the Ukrainian borrower.
This said, where the borrower is a Ukrainian corporate, the process for loan amendment registration will now require only the lenders' and the Ukrainian supervising bank's involvement, as discussed below.
- If a non-Ukrainian lender assigns its rights and benefits under a foreign currency loan agreement to another non-Ukrainian lender, the registration may be carried out based on the joint application of the assigning lender and the new lender.
- If a Ukrainian bank assigns its rights and benefits under a foreign currency loan agreement to a non-Ukrainian lender but assumes the role of the loan supervising bank, the registration may be performed on the basis of the application of such Ukrainian bank.
- If a Ukrainian bank assigns its rights and benefits under a foreign currency loan agreement to a non-Ukrainian lender but another Ukrainian bank steps in to act as the loan supervising bank, the registration may be carried out based on the application of the assigning lender and the new lender.
Assignment to non-residents of locally booked loans
Under the earlier applicable version of Regulation No. 270, a loan assignment agreement between an existing Ukrainian lender and a new non-Ukrainian lender could not enter into effect earlier than the registration of the underlying loan agreement by the NBU. In practice, this meant that the parties had to think of an instrument in addition to the assignment agreement to regulate their relations prior to the effective date of the assignment agreement. The new Resolution has cancelled this requirement. Going forward, a loan assignment agreement in relation to a loan between a lender and a borrower, both located in Ukraine, may come into effect upon its signing. The borrower, however, will be able to make payments in favour of the new lender only upon the registration of the relevant loan agreement by the NBU.
Following the Resolution, the NBU will continue to enforce the maximum interest rates (MIR) applicable to cross-border loans. At present, all payments by a Ukrainian borrower under a loan agreement with a non-Ukrainian lender may not exceed an amount calculated by applying a MIR (being 11% if the loan tenor exceeds 3 years) to the principal amount of the loan in question.
The Resolution addresses a few issues that arose in circumstances where a locally booked loan accruing interest and fees in excess of the relevant MIR was assigned to a non-Ukrainian lender. Under the new rules, the parties to the transaction are allowed to elect that overdue payments exceeding the amount that would have accrued if the MIR were applied be payable to the new lender upon the assignment becoming effective.
Also, previously, the NBU would turn down an application for registration of a loan agreement in connection with a loan assignment if the payments under the assigned loan agreement would exceed the amount calculated on the basis of the then applicable MIR. Therefore, such loan agreement must have been amended by the existing lender and the borrower with a view to bringing the interest payments and fees in line with the relevant MIR. Now, under the Resolution lenders may proceed even if the borrower fails to cooperate, simply by having the new lender file a letter whereby it irrevocably waives all future payments owed to it in excess of the amounts calculated on the basis of the applicable MIR.
For quite some time, Ukrainian non-performing loans have been labelled as investment gems, although without an opportunity to be truly realisable. By adopting this Resolution, the NBU has clearly moved to make these assets significantly more attractive for foreign investment.