Non-Performing Loans In Ukraine: Not An Easy Matter
By Ihor Olekhov & Oleksandr Svyryd
Posted: 25th September 2012 08:37
The Rationale Behind
The global financial crisis and its repercussions in Ukraine have revived an interest to transfer of loan portfolios from commercial banks to various structures. For the last several years, we have noted an immense interest of Ukrainian commercial banks (including, in particular, banks with foreign capital) in the use of various structures for transfer of their loan portfolios, especially portfolios of non-performing loans ("NPL"), from their balance sheets.
Large but weak loan portfolios are bad for Ukrainian banks. They not only demise the economical performance, but also strain the compliance of the banks with the capital adequacy and other regulatory requirements of the National Bank of Ukraine ("NBU").
This issue has become particularly important since 2011 when the NBU has limited the use of guarantees and security deposits for the release of provisioning requirements for Ukrainian banks. As a result, Ukrainian banks have to not only rely upon support of their shareholders, but also do some homework to clean up their portfolio.
A transfer of the NPL may help the bank to achieve the following goals:
· release of the provisioning in respect of the loan portfolios, in particular, in respect of NPLs,
· removal of such assets from a bank’s balance sheet, and
· the decrease of a bank’s open currency position.
Unfortunately, Ukrainian law does not contain dedicated regulations governing the NPL transfer. As a result, the banks and their lawyers have to be creative and structure the transaction either as a sale or assignment of claims, or factoring.
· Sale/assignment of claims. Ukrainian law expressly recognises the concept of sale of the rights of claim, including the rights to payments (receivables) or monetary claims. This concept envisages the transfer of the monetary claims by the seller to the purchaser for a consideration (purchase price) agreed between the parties.
· Factoring transaction. Under this concept, the claims are transferred to the financier/factor for a compensation (fee) for the financing/factoring services (in practice, any deviation from the nominal price of portfolio can qualify as such). The factor must be a bank or a financial institution.
The above transactions can be documented with the factoring, sale or assignment agreement. Unless envisaged in the NPL documents, no consent of the borrower would be required for the sale/assignment of the creditor’s claims.
The bottom-line of the existing NPL transfer technologies on the Ukrainian market is the actual transfer of contractual claims under the NPL from the bank-originator to the purchasing entity. As a result, the purchaser ultimately replaces the bank-originator in its capacity of the creditor under the NPL.
Historically, Ukrainian banks sell the NPL (i) to SPVs, (ii) to debt collection and factoring companies established in Ukraine, and (iii) to investment funds created in Ukraine. Financial companies and venture (investment) funds are the most popular options.
Such operations are not clear-cut and require careful planning to address the following issues:
· Currency control and tax issues. The parties should carefully investigate the possible regulatory and licensing requirements applicable to the purchaser of the NPL, and address the possible currency conversion and payment issues. It may turn out that the purchaser should be a highly regulated financial company or investment fund, and the foreign currency payments are generally restricted in Ukraine.
· Notarisation of NPL transfer documents. To the extent that the underlying NPL agreements have not been notarially certified, there is no need to certify the NPL sale/assignment agreements. However the agreements on the assignment of rights under mortgage agreements must be notarially certified, which brings additional costs and administrative routine to the transaction.
· Registration of assignment. For any encumbrance (including the assignment) to have legal significance vis-à-vis third parties, it must be registered in the State Register of Encumbrances over Movable Property or Mortgages Register (depending on the type of security). Generally, such registration must be made within five days from the effective date of the assignment.
As a result of inconsistent legislation and regulatory approach to the NPL sales, Ukrainian banks often encounter difficulties with the implementation of the above structures. The most common of them are:
· Banks cannot assign NPLs to non-residents. Currently, every cross-border loan must be registered with the NBU. Any sale or assignment of creditor’s claims to non-resident is subject to the registration with the NBU, too. Because it is the borrower who must carry out such registration, any transfer of NPLs directly to non-resident requires cooperation of the borrowers and is not practicable.
· Transfer of Banking Secrecy and Personal Information. An assignor must provide the assignee with the documents evidencing and relevant to the assigned rights of claim. At the same time, Ukrainian banks must preserve the banking secrecy and personal data related to their clients. However, any client information falling under the banking secrecy protection (including any personal data) can be disclosed by the bank only if and to the extent that the relevant client has consented in writing to such disclosure.
· It may be difficult or impossible to assign NPLs in the litigation or enforcement stage. Unfortunately, civil procedure does not envisage an easy replacement of the claimant. As a result of such replacement, the court may order to restart the litigation and significantly delay the judgment or enforcement.
Traditional NPL sale structures are complicated, involve individual borrowers and require customised legal and regulatory solutions. In our opinion, the next generation of NPL-related transaction in Ukraine will help the banks to release the NPL provisions without the actual sale or assignment of the NPL.
The new, risk sharing approach cuts off a number of major regulatory constraints and envisages the sale of the economic risks in the NPL (not the actual creditor’s claims). Although the risk sharing approach is relatively new and requires additional ad hoc confirmations from the regulators, it already attracted sufficient interest from the market players due to the following advantages:
· No need to sell the NPL. The purchaser and bank enter into foreign law governed agreement on purchase of the economic risks in the NPL. There is no legal assignment (transfer) of rights of claim in respect of the NPL.
· No Purchaser – Customers issues. The purchaser does not obtain any direct recourse or rights to the NPL and the borrowers. The bank remains a contractual creditor and continues to service the NPL. Accordingly, there are no issues of notification of the borrowers or registration of loans with the NBU. Importantly, the bank can remain the legal counterparty in the legal proceedings at any state of litigation and/or enforcement proceedings without any changes because the risks and benefits of the loan have been effectively transferred to a third party, although from a strict Ukrainian law standpoint, the bank remains the formal creditor of the borrower.
· Bank gets the fixed upfront payment. The purchaser pays to the bank an upfront non-refundable lump sum payment based on the outstanding indebtedness of the NPL. In return, the bank pays the proceeds of the NPL actually received or collected by the bank from the NPL.
Despite the legal and regulatory drawbacks, alienation of the NPL and their economic risks remain a principal task of the Ukrainian banks in order to survive the current economic turbulence. Since the legal developments do not follow the demands and requirements of the market, there appears to be plenty of space for creative legal solutions in this area.
Ihor Olekhovis a Partner in the Kyiv office of Baker & McKenzie specialising in the areas of banking and finance, financial regulation and banking compliance, acquisition finance, project finance focusing on renewable energy projects, mergers and acquisitions with specific focus on banking and financial services markets, capital markets, tax and corporate finance law, aviation law and private banking. Ihor Olekhov is experienced in advising on banking, corporate finance and tax law; structuring complex equity and debt transactions, acquisition finance, financial services regulation and compliance work, tax planning advice and transfer pricing in international transactions as well as advising aircraft lessors and lessees in respect of operating aircraft in Ukraine. Ihor is also an expert in capital market transactions and debt restructurings.
Mr. Olekhov contributes articles on corporate, financial, tax and banking law issues to major Ukrainian and international business and trade publications. He is a member of the Ukrainian International Law Association and the National Council for Civil Liberties (Liberty), a human rights organisation of the UK. He was chairman of the Legal Committee of the European Business Association from 2007 to 2009.
Ihor Olekhov can be contacted by phone on +380 44 590 0101 or alternatively via email at Ihor.Olekhov@bakermckenzie.com
Oleksandr Svyrydis an Associate in the Kyiv office of Baker & McKenzie specialising in project finance, acquisition & aircraft finance, general banking & finance, general investment & regulatory, structured finance, and capital markets. Oleksandr is often involved in mergers and acquisitions with specific focus on banking and financial services markets, as well as in financial services regulation and compliance work.
Oleksandr has broad experience acting for both lenders and borrowers in a wide range of international finance transactions. He has also represented Ukrainian companies and banks in a number of capital markets and project finance transactions. Oleksandr has been extensively advising foreign and Ukrainian clients on various investment, financial regulation and general banking and commercial law matters.
Oleksandr received his Magister Juris in European and Comparative Law degree from the University of Oxford in July 2004. He has also graduated from the Yaroslav Mudry National Law Academy of Ukraine in 2003.
Oleksandr Svyryd can be contacted by phone on +380 44 590 0101 or alternatively via email at Oleksandr.Svyryd@bakermckenzie.com