Loan Relationships During and Beyond the Pandemic

Businesses in various domains will continue to experience negative effects from the COVID-19 pandemic beyond the long-awaited termination of quarantine measures introduced by the Ukrainian Government. This article is a brief overview of government initiatives aimed at maintaining and restoring the liquidity of Ukrainian borrowers’, as well as certain recommendations on how to maintain loan documentation in good order.

Ban On Interest Rate Hikes 

The Verkhovna Rada of Ukraine has forbidden raising interest rates (except for floating rates) on consumer loans initially until 31 May 2020 and, subsequently, till the end of the calendar month following the month of expiry of the quarantine period. Parliament also introduced a general temporary ban on Ukrainian financial institutions increasing interest rates under any loan agreements concluded with Ukrainian borrowers. This ban will remain in force for the duration of the restrictive measures introduced by the Ukrainian Government in response to COVID-19.

Penalties for Failure to Perform Payment Obligations

The Ukrainian Parliament also prohibited lenders from applying negative measures, including fines and penalties, for failure to perform payment obligations under consumer loans till the end of the month when the quarantine period ends. It also obliged the Ukrainian Government to prepare legal acts aimed at the deferral of payments under financial arrangements secured by a mortgage (see Law of Ukraine No. 530-IX On Amending Certain Legislative Acts of Ukraine Aimed at Prevention of Emergence and Expansion of COVID-19 (530-IX Law)). However, no such legislation has yet been adopted. Although by its letter of 22 March 2020, the National Bank of Ukraine obliged banks to notify borrowers that payments for loans secured by mortgages would be deferred for the duration of the quarantine, neither 530-IX Law nor any other piece of Ukrainian legislation unambiguously requires such a deferral. Later in June, the Ukrainian Parliament passed amendments to the Civil Code and the Commercial Code that allow borrowers not to pay fines and penalties for failure to perform monetary obligations under credit (loan) agreements which occurred within the quarantine period and thirty days thereafter.

Foreclosure on Collateral

Ukraine’s Law No.530-IX strictly prohibits the enforcement of residential property in discharge of debts on utility services. Although the same law obliged the Ukrainian Government to develop legislation imposing a broader ban on mortgage foreclosures, no such legislation has yet been passed. In addition, no express ban on the enforcement of pledges during the quarantine period exists. However, it can be argued that, in respect of consumer loans, the prohibition on the imposition of liability for failing to perform payment obligations during the quarantine may be interpreted as a restriction of foreclosure if triggered by such payment default.

National Bank Encourages Restructuring

Another initiative to ease the financial burden of Ukrainian borrowers was launched by the NBU via the adoption of Regulation No.39 da­ted 26 March 2020 (Restructuring Regulation). The Restructuring Regulation liberalized certain regulatory requirements related to credit risk assessment, purporting to stimulate Ukrainian banks to enter into debt restructuring arrangements with their clients suffering from the consequences of the pandemic.

The NBU clarified that the restructuring should be made available for debtors that were not in default as of 1 March 2020. Loan agreements should be restructured by September 2020. The carrying out of restructuring is also subject to conditions that (i) it is necessary, in view of financial difficulties caused by the quarantine and restrictive measures introduced by the Ukrainian Government, and (ii) the bank in question is able to justify the launch of either a short-term or long-term perspective restructuring based on evaluation of the debtor. To this end, corporate debtors applying for the restructuring should provide banks with evidence of a significant decrease in their revenue levels or termination of their business activity.

As per the NBU recommendation, banks are encouraged to elaborate special programs on restructuring for small businesses and individuals and to automatize the process as much as possible. In each case, banks consider the restructuring of debts of medium and large businesses on a case by case basis. So as to take a decision on restructuring, banks should assess, among other things, whether a debtor will be able to restore its sound financial standing in future.

There is no exhaustive list of restructuring measures; in each particular case, the bank and its client can negotiate the set of such measures. However, the NBU recommended that banks make use of the measures provided for in the NBU regulations, including the deferral of principal instalment repayments and extension of maturity dates, introduction of PIK interest option, decrease of instalments and other payments amounts, etc.

Restructuring Stimulated by State Programs

Ukrainian authorities introduced a number of measures (including exemptions from certain tax liabilities) to support businesses suffering from the introduction of restrictive measures.

Thus, the Ukrainian Government has tailored the existing “5-7-9% affordable loans” state program (loans for up to UAH 3 million (≈EUR 100 thousand) at reduced rates) to address the needs of small businesses in light of the negative effects of the pandemic. The “5-7-9%” loan may now be obtained by eligible businesses with annual revenues not exceeding UAH 100 mil-
lion (≈EUR 3.33 million) specifically to prevent or overcome the negative consequences of the virus. Such loans are provided through approved banks and may be supported by the state through the provision of a partial guarantee to secure loan obligations or partial financing of interest payments. In June, the Ukrainian Government decided to loosen certain requirements to eligible borrowers and loan projects, including the limitation on maximum amount of a loan extended under the program. Such amendments are yet to be implemented.

In addition, the updated program provides an opportunity for certain Ukrainian borrowers to refinance their existing indebtedness to Ukrainian banks, including via restructuring. The state supports the refinancing of such indebtedness through the compensation of interest payments and is available for entities with annual revenues of up to EUR 10 million. The amount of refinancing is not limited as long as the amount of state support assigned to the refinancing does not exceed EUR 200,000. In June, the Ukrainian Government decided to loosen certain requirements to eligible borrowers and loan projects, including the limitation on maximum amount of a loan extended under the program.

However, the authorities have not yet developed a comprehensive program of liquidity support for Ukrainian companies of various scales of business and industry sectors, which would resemble, for example, the KfW Special Program 2020 and Economic Stabilization Fund in Germany or COVID Corporate Financing Facility and the Coronavirus Large Business Interruption Loan Scheme in the UK.

Provisions of Loan Documentation Affected by Pandemic

The measures described above to maintain the liquidity of borrowers as well as to restructure their indebtedness apply in the main to loan arrangements with Ukrainian lenders. Although loan arrangements with non-residents are not subject to the restructuring encouraged by Ukrainian authorities, undertaking the necessary measures in relation to loan agreements with both foreign and national lenders in a timely manner would help to maintain friendly and productive relationships.

Review of loan and related documentation to determine the extent to which the pandemic and related measures imposed by the authorities may affect the discharge of borrowers obligations in both the short and long-term is also recommended. The set of provisions in loan documents with national and foreign lenders may differ. So, in the first instance, pay attention to the following: payment schedule, drawdown provisions, repeated representations, financial covenants, project completion covenants, material adverse effect (MAE), force majeure, events of default (EOD), etc.

It is also worth investigating the provisions of related security documents and material (project) contracts to figure out how disruptions or defaults in the performance of underlying contracts may affect the existence and value of the security involved. Verify the provisions on contractual liability and force majeure events in all project-related contracts so as to assess whether your counterparties are able to claim force majeure and how this would affect your project.

Protective and Remedial Actions

On the basis of review of documentation, the borrower may decide to make waiver requests (in respect of actual or potential defaults or specific negative consequences of breaches), seek amendments or restructuring to mitigate risks or remedy breach. Amendments may purport to provide carve-outs to MAE and material adverse change clauses, extension of maturity dates and payment schedule changes, introduction of interest holidays, adjustments of financial co­venants, etc. If the coronavirus outbreak has a significant impact on your business and ability to perform payment obligations, then financial restructuring should be considered.

Conclusions

The measures to loosen liquidity tension for Ukrainian borrowers and incentives for restructuring, as introduced by the state authorities, are aimed at resolving issues of indebtedness before domestic lenders only. In these circumstances, large Ukrainian corporates may suffer from a lack of support to tackle negative effects resulting from the pandemic. Regardless of whether a company is in loan relationships with local or foreign lenders, it is important to monitor a company’s financial standing and to negotiate issues in a timely manner.