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Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

Depending on the borrowers’ groups, providers of secured finance in Azerbaijan may vary. When local banks and non-banking financial institutions lend proceeds borrowed from abroad, ultimate lenders are generally assigned such security interest. International banks typically lend to state-owned enterprises and often do not use collateral to avoid triggering negative pledges on Azerbaijani undertakings under international borrowings.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

No, there is no such documentation adopted for the Azerbaijani market. Transactions between local borrowers and international banks are typically governed by foreign law and based on the Loan Market Association’s standard documentation.

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Yes, for large lending transactions, which are commonly subject to foreign law.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Yes.  As far as security for loan is concerned, the parallel debt provision is used for loan documentation which is otherwise governed by foreign law.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

No, except for limited cases where a person can act on its own behalf in the interests of others (eg, as a commissionaire). Azerbaijani law does not recognise the concept of ‘security trustees’ or ‘security agents’ and requires that security documents thereunder disclose obligees as security holders (alternatively, the parallel debt provision as discussed above is used).

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

Yes, although the establishment of SPVs is common for cross-border transactions. In domestic deals, financed assets are held directly by the borrower. Generally, security over the shares is insufficient and does not protect assets from being disposed of; therefore, security is normally taken over both shares and assets.

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

In domestic borrowings, interest is most commonly calculated by reference to the base rate of the Central Bank of the Republic of Azerbaijan. In cross-border transactions, the most common rates are LIBOR and EURIBOR.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

No, there are no restrictions on the rate of interest that can be charged on bank loans (although accrual of interest on penalty is restricted). Azerbaijani law restricts the deductibility of interest from taxable profits, thereby limiting interest paid on foreign loans to 125% of the average interest rate charged in the same currency for similar periods of time at an “interbank credit auction or, if such auctions are not conducted, [the interest rate] of interbank credits as published by” the Central Bank of the Republic of Azerbaijan.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes, licensed financial institutions can issue guarantees, whereas sureties can be issued by any other person.

What is the procedure for their creation?

No specific procedure applies for the creation of guarantees. Guarantees must be in writing. The bank issuing a guarantee must meet applicable prudential requirements regarding its level of exposure.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

No, save that Azerbaijani law requires state enterprises indebted to the state budget to obtain a permit from the Ministry of Finance to issue a guarantee subject to foreign law or surety subject local law. No specific regulation or restriction for upstream guarantees apply.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Debts and security are prioritised on a first-come, first-served basis (ie, the earlier the security was registered with a designated register, the more priority it will have over other security in the same asset). In order to change the order of priority, all affected creditors must provide a written agreement. Should such arrangement touch on hypothec or other claims and security under notarised agreements, the concerned written agreement must also be notarised.

The new Law on Encumbrance over Movables, which came into effective on May 28 2017, will (once implemented) allow creditors to prioritise their claims by making public the encumbrances securing such claims. In order to do so, creditors can record them in the encumbrances’ register (when implemented) or get possession over, or acquire control of, the encumbered items.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

No specific taxes, stamp duty or fees apply on the granting of a loan, guarantee or security interest, or on its enforcement, except for:

  • notary charges – levied on notarisation of security arrangements at a m30 maximum;
  • state duty – m10 to register a pledge and m20 to register a hypothec; and
  • collection fee – charged by bailiffs at 7% on top of the amount collected from an obligor.

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