CROSS-BORDER LOAN TRANSACTIONS FROM A SOUTH AFRICAN PERSPECTIVE
This is the first in a series of articles addressing questions that frequently arise when arranging syndicated and cross-border loan transactions involving South African parties.
The South African loan market regularly sees syndicated and cross-border loan transactions. It is common that these transactions involve a number of legal jurisdictions and that the documents used in these transactions are governed by a legal system other than South African law. The need then arises to reconcile the requirements and practices of the different systems of law to ensure that such transactions are commercially viable, bankable and consistent.
One such requirement that must be addressed at the outset of every cross-border transaction is its exchange control analysis pursuant to the South African Exchange Control Regulations, 1961 (Regulations). South Africa has extensive rules concerning exchange controls which are applicable to any cross-border lending transaction, as well as the granting of South African security in relation to foreign loans. Typically, obtaining the appropriate exchange control approval from the Financial Capital Surveillance Department of the South African Reserve Bank (FSD) will be included as a condition precedent in the relevant loan agreement.
Use authorised dealers only
The Regulations provide that no person in South Africa is permitted to borrow any foreign currency from any person who is not an authorised dealer, unless that borrower has obtained the prior approval of the FSD, and then only in accordance with such conditions as the FSD may impose. Therefore, a resident borrower will need to apply to an authorised dealer of the FSD for exchange control approval prior to effecting the relevant borrowing from a non-resident lender.
FSD approval is also required where a resident lender relies on the security provided by a non-resident for a loan made to a resident borrower; or conversely, where the security is provided by a resident in respect of a loan made by a non-resident lender to a non-resident borrower. Even an unsecured foreign loan to a South African borrower requires exchange control approval.
So-called loop structures are considered to be contrary to the FSD’s policy. A loop structure is created when South African residents acquire interests in foreign entities, which in turn make investments in or advance loans to South African residents. For instance, a South African resident is not permitted to invest in a foreign incorporated company which advances funds to a resident of South Africa. Certain exceptions apply to this policy. Also, South African residents are allowed to invest without restriction into a foreign company that has a secondary listing on the Johannesburg Stock Exchange.
The Exchange Control Manual (Manual), sets out guidelines for South African residents wishing to obtain offshore loans. The Manual also sets outs the terms and conditions of loans which may be approved by an authorised dealer. Note, that most large South African commercial banks are authorised dealers of the FSD. An application to the FSD must be submitted via an authorised dealer and is typically processed between four and six weeks after its submission.
Onus is on the SA resident
It is important to note that the requirement to obtain exchange control approval is a regulatory burden placed on the South African exchange control resident, not the offshore transaction parties. It is nevertheless prudent for an offshore lender to take adequate steps to ensure that the requisite approval has been properly and timeously obtained by the South African borrower and, to this end, Bowmans recommends the inclusion of appropriate conditions precedent, as well as representations and warranties, in the transaction documentation.
The FSD imposes limits on the interest that a non-resident lender may charge a South African borrower on certain loans. These limits differ depending on whether the lender is a shareholder of the borrower or a third party and whether the loan is denominated in South African Rand or another currency.
Note that where a borrower wishes to repay a loan early (in whole or in part), this will not be permitted without the FSD’s specific prior approval, which must be obtained at the time of the proposed early repayment. The rationale behind this is that agreeing to early repayment is not the FSD’s general policy.
Once the underlying loan agreement has been approved, the interest payable and the repayments in respect of the principal foreign loan, are freely transferable offshore. The application to the FSD will typically set out the term of the loan, the rate of interest and how it needs to be calculated, as well as when interest or capital payments will be due under the loan.
If the requisite FSD approval is not obtained in respect to a cross-border transaction, an offshore lender’s claim (whether for repayment of the loan or the enforcement of any security granted by a South African obligor) against the South African borrower or security provider will be at risk. The FSD has the authority to prevent such repayment or enforcement and to declare the relevant transaction documents invalid. South African case law confirms that a lack of exchange control approval from the FSD does not render an agreement void but that it can be declared invalid by the FSD on the basis that it contravenes the Regulations.
Notably, the FSD can grant the requisite exchange control approval after the fact, but this could lead to the imposition of penalties on the South African exchange control residents who are a party to the relevant cross-border transaction.
The next article in this series will consider the requirements that each of a foreign lender and a local borrower must bear in mind when entering into cross-border loan transactions.