Vietnam has ambitious recovery and growth plans, so one might be surprised to hear that new measures have been proposed that would substantially constrain the deployment of foreign debt for investment projects.

But that is just what is proposed in the Draft Circular on Conditions for Enterprises’ Offshore Loans without Government Guarantee. By its name, you would assume the new Circular would be more liberal than previous rules because no State guarantees are involved in the debt transactions that will be impacted. Private sector loans, you might say, should be allowed between private parties. 

On the contrary, the new rules only allow for inbound cross-border debt to certain types of licensed foreign investment projects. Specifically, projects that do not fall into categories needing Investment Registration Certificates (IRC) or Investment Policy Approval Decisions (IPAD) can not borrow from offshore. Among others, this seems to include Public Private Partnership (PPP) projects, though that may just have been an oversight. 

Overall, this reduced role for foreign debt seems to have the intention of forcing more borrowers, especially domestic borrowers who might otherwise be eligible for foreign debt, to rely on local lenders for the debt portion of their financial structure. 

One might think that this is intended to prevent over-heating the economy but by impacting enterprises with some foreign capital needs who were previously eligible for foreign debt, this measure also seems to be intended to drive business to the local banks. 

The draft Circular also proposes new rules on the “enforcement agent” as distinguished from “security agent”. The latter has been a normal feature of the Vietnam cross-border debt market, including the roles of both “enforcement agent” and “security agent” under Circular 42/2011/TT-NHNN. But going forward the two functions will need to be split, though it is not clear whether parties may wait until the enforcement stage to involve an enforcement agent.

In addition, there are issues regarding the allowable debt to equity ratio of 30% across the board, an 8% cap on expenses that may be charged in a cross-border debt transaction, mandatory hedging requirements, restrictions on using offshore holding companies as financing vehicles, and other interventions by the State in what are usually private sector terms and conditions. 

The Banking Working Group of the Vietnam Business Forum have discussed this issue and they have submitted a detailed set of comments and suggestions to the State Bank. Please contact the VBF for more information.

Senior Advisor 

Baker & McKensie 

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