Ukraine: Distinctive Features Of Legal Regulations Regarding Cross-Border Financing For Ukrainian Borrowers

The tough currency policy pursued by the National Bank of Ukraine ('NBU') is conditioned by the need to maintain and regulate the national currency rate and control and limit the inflow and outflow of foreign currency in the country. In addition, in view of the current economic situation in Ukraine in general and specifically in the banking and financial sector, the provision of loans to Ukrainian borrowers by local banks is rather limited. Foreign currency loans provided by Ukrainian banks are restricted by law. Therefore, raising cross-border finance is increasingly crucial for Ukrainian companies.

Ukrainian legislation vests the NBU with a broad range of powers regarding currency regulation and control, which are also implemented on a law-making level. To the extent of its powers, the NBU develops binding regulations which form an integral part of Ukrainian legislation.

A brief introduction to the basics of this issue will aid further understanding of the unusual aspects of regulation of cross-border financing, as well as emphasising the need to consider its requirements when structuring transactions and their respective documents.

This article gives an insight into the basic currency and regulatory requirements and the distinctive features of syndicated lending for Ukrainian borrowers.

As mentioned above, the national currency of Ukraine is not convertible and all transactions involving foreign currency may only be made as prescribed by law. Since Ukrainian borrowers are subject to strict regulations and restrictions regarding the purchase of foreign currency and settlements in foreign currency, it is important for creditors to understand these specific restrictions and requirements in order to appreciate the currency risks and to structure transactions to minimise such risks.

All transactions with Ukrainian borrowers regarding receipt, repayment and servicing of cross-border loans must be made via a Ukrainian servicing bank, where the respective borrower holds an account. A servicing bank acts as a currency control agent and must verify all currency transactions for their compliance with the requirements of mandatory Ukrainian legislation. If a currency transaction fails to meet the requirements of Ukrainian legislation, the servicing bank must refuse to carry it out or undertake other actions to cause the relevant authorities to apply sanctions.

Foreign currency purchased by a client to repay a loan or for other purposes permitted by Ukrainian legislation may only be used for its respective purpose within the strictly defined terms of its purchase. Here again, the servicing bank is in charge of supervision of compliance with the relevant requirements.

All cross-border loans to Ukrainian borrowers (with a few exceptions, ie loans under state guarantee) are subject to state registration with the NBU. Furthermore, such loan agreements must contain a provision (regardless of the governing law) specifying that they will only come into force upon registration with the NBU. Disbursements of a loan may only be made after its registration with the NBU. NBU registration will be cancelled if a loan (or part of it) is not disbursed within 180 days of registration.

The period for registration is about one week. The required documents for registration, together with a registration application, must be filed by the borrower.

The NBU may refuse registration, if a loan agreement contravenes the mandatory requirements of Ukrainian law.

A maximum interest rate for loans is one of the basic specified requirements. Subject to the provisions of the law, the NBU will set (and review from time to time) maximum interest rates for cross-border loans. At present, the maximum interest rate for loans in euros or US dollars is LIBOR for three-month deposits in US dollars plus 750 basis points (for a floating rate) and 11 per cent per annum for a loan term exceeding three years (for fixed rates). Additional requirements as to interest rates apply to subordinated loans.

The above interest rate cap set by the NBU includes commissions, fees, default interest and other payments under the loan agreement (except principal). If the interest rate, including all other payments under a loan agreement, exceeds the established cap, the NBU will refuse to register the loan.

Certain amendments to loan agreements are subject to registration with the NBU and are only effective upon such registration. These amendments include changes in the payments under an agreement and change of creditor.

In general, Ukrainian law provides a basis for syndicated lending both for multiple creditors and borrowers. Nevertheless, established market practice is that English law is typically used to govern syndicated loan agreements. However, English law is only applicable if a foreign element to the transaction exists. As mentioned above, cross-border loans must be registered with the NBU. If a syndicate involves not only foreign but Ukrainian banks as well, the latter's participation need not be registered. However, in practice, if a facility/payment agent is located abroad and settlements, including for the Ukrainian bank, are made through the cross-border agent's account, in most cases the whole loan must be registered with the NBU. It is notable that the established maximum interest rate applies only to that part of the loan raised from non-residents. A Ukrainian lender participating in a syndicate often performs the functions of a payment agent in the syndicate. This structure allows for the optimal handling of issues relating to currency control and the structure of security in the transaction, among other things.

The requirement to register any change of non-resident creditor with the NBU often complicates free transfer of the direct participation in such syndicates in the market, if it is possible at all. This problem may be partially solved by employing a silent participation structure and having the relevant lender 'off the record'.

In this article we have discussed only the general issues of currency regulation and regulatory requirements. The following atypical characteristics of syndicated lending to Ukrainian borrowers are also worthy of mention.

When structuring syndicates involving Ukrainian borrowers it is essential to consider issues pertaining to the absence of the concept of 'security trustee', the respective problems when registering encumbrances, the contradictory nature of laws regarding tax gross-up, the lack of an effective mechanism to repay abroad from the proceeds of sale of collateral and other unusual aspects of Ukrainian legislation.

It is true that the distinctive features of the Ukrainian legal system do not always promote the development of cross-border financing. However, such financing nowadays is increasingly demanded by Ukrainian borrowers due to the limited financing available to Ukrainian borrowers from local banks.

This article was published in the Butterworths Journal of International Banking and Financial Law in July 2010. Please kindly note that Ukrainian legislation has changed since then and some of the information provided might be irrelevant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.