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Debt restructuring
The borrower can opt to restructure repayment terms of an onshore loan, which means that the lending credit institution agrees to adjust the repayment term either by extending the overall term of the loan or extending the repayment schedule without extending the overall term of the loan. After considering its own financial capability and the borrower's source of revenue for repayment, the onshore lender can consider adjusting the repayment schedule (without extending the term of the loan) or granting an extension to the term of the loan if it believes that the borrower can fully repay after restructuring. The parties must restructure the repayment term within 10 days from the agreed repayment date. Other than adjusting the repayment schedule or extending the term, the borrower can also apply for an exemption or reduction of interest or fee provided that such exemption or reduction complies with the lender's internal policies.
Even though there is no specific regulation on restructuring an offshore loan, the borrower should also be able restructure an offshore loan. In doing so, the borrower should be mindful to, among other things, perform any necessary registration with the SBV if the restructuring results in any changes to the contents of the offshore loan registration certificate issued by the SBV.
Debt restructuring during the COVID-19 pandemic
Depending on market conditions, the SBV may from time to time issue specific regulations to address a specific situation or issue. For instance, in response to the debt distress caused by the continuing COVID-19 pandemic, the SBV issued Circular No. 01, which provides for, inter alia, restructuring of repayment timelines as well as reduction of and exemption from interest and fees to support customers affected by COVID-19. Correspondingly, onshore lenders are allowed to maintain debt classifications with regard to the debt balances subject to debt restructuring due to COVID-19 and therefore can perform reserve provisioning more effectively and efficiently.
More than two months after Circular No. 01 was issued, as at 25 May 2020, Vietnamese onshore lenders have restructured payment terms for approximately 224,000 customers with a combined outstanding debt of over VND 152 trillion, and waived or reduced interest for approximately 326,000 customers with a combined outstanding debt of over VND 1,100 trillion. As a further response to address the negative effects of the pandemic, in May 2020, the SBV contemplated amending Circular No. 01 to extend the scope of eligible debts benefiting from Circular No. 01 to debts with repayment obligations incurred from 23 January 2020 to 31 December 2020 and debts disbursed from 23 January 2020 to before 25 April 2020.
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Refinancing
Alternatively, the borrower can explore the refinancing option, which means that the borrower replaces an existing loan/debt obligation with another loan/debt obligation. The borrower can refinance its loan by obtaining a loan from an onshore lender, an offshore lender, or a combination of both, but each option must comply with a different set of Vietnamese regulations. Refinancing using a syndication of onshore and offshore lenders must comply with both sets of regulations as applicable.
Refinancing using onshore loans
The SBV has issued specific guidelines on how credit institutions in Vietnam may offer onshore loans anew to refinance both existing onshore and offshore loans. Refinancing using onshore loans will be subject to certain requirements under the SBV's regulations as follows:
A borrower may obtain an onshore loan to repay its existing debts at other Vietnamese credit institutions and its offshore loans if:
- Such onshore loan will be used to repay the debt before the debt’s payment due date.
- The following requirements are met:
Both loans must be used for the borrower's business activities
The term of the new loan must not exceed the residual loan term of the existing loan.
The old loan must be a loan under which the debt rescheduling has not been carried out.
In practice, if the borrower's existing loan is maturing soon, and the borrower would like to refinance the loan to extend its term, it would be legally impossible to do so by obtaining an onshore loan because the term of the new loan must not exceed the residual term of the existing loan. Moreover, if the term of the existing loan has already been extended once, it cannot be refinanced using an onshore loan.
Refinancing using offshore loans
If the existing loan is an offshore loan, the borrower would have the option to refinance its existing loan by obtaining an offshore loan instead. Indeed, in such a case, the borrower is not subject to restriction either on the term of the offshore refinancing loan or on the refinancing of a loan for which debt rescheduling has occurred. However, the borrower needs to ensure that the new loan's borrowing cost must not exceed that of the existing loan. The borrowing expenses may include interest rates, insurance fees, agency fees and other loan-related fees that the borrower will have to pay to get the loan, which should be calculated on an annual basis (i.e., % of the loan per annum). As a matter of practice, we understand that a loan's borrowing cost will be calculated by aggregating costs for the entire loan and then proportionating such amount evenly for each year of the loan term to have an annual cost in percentage per annum. As such, even if the total cost (i.e., the total amount payable by the borrower to the lender throughout the loan term) of the new loan is higher than the existing loan, it will still be permitted under Vietnamese laws as long as the borrowing cost per annum of the new loan is not higher than the existing loan. This is normally the case where the new loan has a longer term than the existing loan.
For a mid-/long-term loan (i.e., a loan having a term of more than one year), consideration and attention should be given to the requirement to register with the SBV. In this case, the borrower will need to perform an amendment registration with the SBV to amend the term and repayment schedule (if such schedule is changed by more than 10 days) of the existing loan and/or perform a registration of the new offshore loan, as applicable. These applications must be separate, but they will be submitted and reviewed simultaneously.
In practice, this registration process usually takes a few weeks from the date the borrower first submits the application. The process takes longer if there is a need to supplement or clarify the content of the application dossier. As such, if the borrower is obtaining the new offshore loan to repay a debt obligation that will soon become due, the SBV application should be performed as early and promptly as possible.
Another practical issue is whether the borrower's offshore borrowing limit would be exceeded during the period of time after drawdown of the new loan and before repayment of the existing loan. There is an understanding that the drawdown amount under the new loan combined with the existing outstanding loan amount must not exceed the borrowing limit. As such, the borrower may need to leave some room in the borrowing limit to ensure that a drawdown of the new refinancing loan will not result in the borrower exceeding its applicable borrowing limit.
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In conclusion, debt restructuring and refinancing are both available as options. From the legal perspective, each option has its own restrictions and implications. Lenders and borrowers should properly assess and understand all options available to them to match with their business plans and capability. Lenders and borrowers should also keep up to date on the upcoming debt resolution incentives from the government, especially in the time of the COVID-19 pandemic.