We have talked with the Deputy Chairman of the Board of DBK Asset Sharipov, who oversees the legal support of the Bank's activities, to find out what the product of syndicated financing is and how it will affect lending to the real sector of the economy.
- Asset Bulatovich, why did it become necessary to amend the Law about banking syndicates?
- In 2015, DBK approved the Concept of Syndicated Financing of Investment Projects and the Action Plan for the implementation of this new loan product in the Bank. The goal was quite simple - to stimulate lending to non-resource sectors of the economy of the Republic of Kazakhstan through joint lending to projects with commercial banks, international development institutions to share or reduce risks in financing projects.
Five years ago, we carried out colossal work in this direction. We made changes to the Law of the Republic of Kazakhstan "On the Development Bank of Kazakhstan", introduced new and changed the existing internal documents, entered the International Association of Professional Participants of the Syndicated Loan Market (Loan Market Association), and joined the Debtdomain service for the safe and convenient exchange of confidential documents related to syndicated transactions. We also signed memorandums of understanding and cooperation with 28 banks, including second-tier banks, development banks, subsidiaries of large foreign banks.
However, since then not a single syndicated loan has been sold. The main reasons are the existing risks of this product due to the lack of clear regulation in the legal acts of the Republic of Kazakhstan. Therefore, DBK initiated these changes, and now the draft Law is amending the Civil Code, the Laws "On Banks and Banking Activities in the Republic of Kazakhstan", "On Development Bank of Kazakhstan", "On Project Financing and Securitization", "On Rehabilitation and Bankruptcy". Also, amendments have been made to the Economy of Simple Things mechanism, including the possibility of subsidizing rates on joint syndicated loans of STBs and DBKs up to 6% in those industries that most need support and are aimed at import substitution, export orientation, and infrastructure development. However, without the adoption of the bill, this mechanism loses its relevance.
- What innovations are spelled out in this draft Law?
- In the case of syndicated financing, the creditors-pledgees have a joint and several claims against the borrower, and the pledger secures the return of the money with a pledge of property established in favor of all creditors - participants of the syndicate of banks, both in general and concerning each of the participants. Therefore, it became necessary to provide for the legal category of creditors who also act as shared pledges, for example, when it comes to the indivisible subject of a pledge.
Another innovation is the rule that in case of syndicated financing on behalf of and the interests of all creditors, there is one agent bank or collateral manager, which is determined from among the creditors or third parties. The responsibilities of the agent bank include such procedures as maintaining a register of creditors, accounting for loans provided by each lender, accounting and distribution of payments received from the borrower among the syndicate participants, forming and maintaining a credit dossier, communication, and negotiations with the borrower. The agent bank concludes a pledge agreement with the pledger and exercises all rights and obligations of the pledgees under the pledge agreement.
All these procedures are relevant and practical for all members of the syndicate. For the borrower, it is convenient in terms of negotiating with only one authorized person instead of several lenders. The financial institution receives income and controls the entire lending process, without burdening business processes and not attracting unnecessary labor resources.
If the borrower does not fulfill the obligations under the agreement, the creditors have the right to recover the pledged property out of court or in court, while the money from the sale of the pledged property will be distributed among the creditors in proportion to the size of their claims. In case of a judicial order of collection, the authorized person submits a claim, participates in the judicial process, and acts on behalf of and represents the interests of all creditors. In the out-of-court procedure, the authorized person carries out the procedure for the sale of the pledged property, notifies the borrower about the delay and the consequences of default on obligations, coordinates between the borrower and creditors about a possible change in the terms of the contract. Also, the agent bank has the right to apply to the court to declare the debtor bankrupt or apply a rehabilitation procedure.
- How this product can be interesting to business, because, apparently, procedurally syndicates are much more complicated than a regular loan with one lender?
- The key advantage of syndicated financing is the ability of the borrower to obtain large financing at lower interest rates and for a longer period. For example, due to weak capitalization and high credit risks, a bank alone is unable or unwilling to issue a significant loan to a borrower. Raising a syndicated loan allows us to meet the needs of large companies in financing large-scale, capital-intensive projects. As for the complexity of the procedures, on the contrary, the borrower significantly reduces the financial and time costs for negotiations and execution of a syndicated loan agreement compared to raising the same amount from different banks. The reputation of the borrower in the domestic and foreign financial markets is also strengthening, which will further allow him to expand the base of creditors. With syndicated financing, the borrower can count on an increase in the loan term and a decrease in the interest rate.
- Are syndicates of interest to commercial banks and why is it for the Development Bank?
Today, the strategies of second-tier Kazakh banks have been adjusted in favor of the priority of retail products. The volume of retail lending is increasing, while lending to the real sectors of the economy is decreasing. The share of loans to individuals in the total loan portfolio of STBs increased from 31.3% in 2017 up to 42.9% in 2019.
Perhaps this is due to the weak functioning of the transmission mechanism of monetary policy and regulatory restrictions on limits, affecting the attractiveness of banking products, low loan rates, as a result, for large and long-term investment projects, government funding is constantly required, which is difficult to implement in conditions of a budget deficit.
Moreover, commercial banks never fully recovered from the consequences of the 2008-2009 global crisis. Kazakhstani STBs do not have large amounts of long-term money to finance long-term capital-intensive projects. Therefore, big business is mainly supported today by the Development Bank. However, DBK does not set itself the task of dominating the real sector of the economy; on the contrary, we advocate the development of market credit products, private initiative, and entrepreneurship. Syndicated financing is the first step towards a new, mutually beneficial lending product with minimal risks for the lender and the borrower. Therefore, syndicated financing transactions, due to the possibility of sharing risks with Development Bank and other creditors, can create favorable conditions for the participation of commercial banks in large projects.
- Have there been such bank syndicates on the Kazakhstan market before?
- Syndicated transactions in the Kazakhstan market were carried out under a project in the oil and gas, nuclear industry, and mining metallurgy. The syndicates were exclusively credited by foreign financial institutions such as UniCredit, Citi, DeutscheBank, Sberbank CIB, VTB Capital and others. Therefore, we can say that there were no syndicated transactions involving domestic commercial banks in the real economy.
- What other work is being done by DBK on the subject matter?
We continue to interact with both domestic banks and foreign development institutions such as the EBRD, EABR, VEB.RF in terms of syndicated financing. Thus, in January of this year, DBK, as part of the Baiterek Holding delegation, held a visiting session at VEB.RF. Colleagues from VEB.RF spoke about the peculiarities of syndicated financing and presented us with successful cases of completed syndicate transactions. Of course, the knowledge gained will be used by us in the further development of syndicated lending in Kazakhstan. Baiterek Holding and VEB.RF signed an agreement on investment cooperation, which also provides for possible joint syndicated loans. Also, work continues on syndicates with specific commercial banks - SB Sberbank of Russia JSC, Forte Bank JSC, Halyk Bank JSC.
DBK has already formed a pipeline of several projects that are potentially being considered for syndicated financing. The total amount of loans for these projects is 397.7 billion tenge. These are projects in oil and gas processing, metallurgy, food industry, and gas pipeline transportation.
After the signing of the Law by the President of the Republic of Kazakhstan and its entry into force, DBK is ready to offer its services and actively cooperate with financial organizations in terms of syndicated financing. Since this instrument has advantages both for borrowers and for second-tier banks, relying not only on the contractual legal basis but also legislative, which is important for protecting the rights and interests of each of the parties to the transaction.
