Loans & Secured Financing

LOANS AND SECURED FINANCINGS

1 What are the primary advantages and disadvantages in your jurisdiction of incurring indebtedness in the form of bank loans versus debt securities?

The popularity of bank loans compared with debt securities lies in the underdevelopment of the Uzbek securities market. There are statutory limitations for companies to issue debt securities (eg, private limited liability companies are not allowed to issue them at all); their circulation is heavily regulated by the Centre for Control and Development of the Securities Market; while the instrument is generally viewed by the companies as unprofitable and somewhat unexplored in practice. One of the few issuers of debt securities within the market are commercial banks that use them for inter-bank lending or for attracting funds from state-owned investors.

It is likely that the liberalisation of legislation governing debt securities would significantly contribute to their popularity, since bank loans provided by local banks have their own shortcomings which, inter alia, include: lengthy procedures for loan approval; bank unwillingness to extend loans without a security covering about 125 per cent of the borrowed amount; and multiplicity of covenants requested from the borrower.

2 What are the most common forms of bank loan facilities? Discuss any other types of facilities commonly made available to the debtor in addition to, or as part of, the bank loan facilities.

Bank loans vary in form, but are generally term or revolving-loan facilities secured by a borrower's property or a guaranty of third parties. Owing to the widespread problem of currency conversion in Uzbekistan, banks are reluctant to provide loans in foreign currency.

The majority of Uzbek banks provide funds for the following purposes: investment in equipment; working capital financing; wage payment; and participation in investment projects such as construction and productionfacility creation. Loans for investment in fixed assets or for participation in investment projects are usually long term; up to 10 years, whereas replenishment loans are not, as a rule, extended for more than one year.

Another popular type of facility is a letter of credit, which is widely used during import and export operations. It should be noted that opening a letter of credit also requires the provision of a security. Swingline facilities and competitive bid revolving credit facilities are rare.

3 Describe the types of investors that participate in bank loan financings and the overlap with the investors that participate in debt securities financings.

Traditional banks are the major players in bank loan financing, with financial lease companies also playing an active role; however, their share in the market is relatively small. Usually, bilateral loans are provided, while syndicated loans are mainly extended when large state-initiated investment projects are being implemented.

Owing to the strict financial regulatory regime, traditional banks continue to dominate the debt securities financings market. Although Uzbek law provides for the possibility to create investment funds, their operation is overregulated with investors being unwilling to operate through this structure.

4 How are the terms of a bank loan facility affected by the type of investors participating in such facility?

Since traditional banks are the main providers of bank loan facilities in Uzbekistan, terms of extension do not vary much. Note also that stateowned banks generally have more funds than private banks because of their continuous state support, so are more generous and flexible in providing funds.

5 Are bank loan facilities used as 'bridges' to permanent debt security financings?

How do the structure and terms of bridge facilities deviate from those of a typical bank loan facility?

Using loans as bridges is almost inapplicable in Uzbekistan, since debt security financing remains uncommon.

6 What role do agents or trustees play in administering bank loan facilities with multiple investors?

It should be noted that loan facilities with multiple investors lack regulatory guidance. The main legislative act that regulates loan facilities with multiple banks is the one that relates to syndicated loans for financing large investment projects over 25 per cent of the amount of the banks' regulatory capital. In this type of financing, a leading bank is assigned by the participating banks and is responsible for administrating the loan facility and monitoring the project in the name of the other participating banks. A bank is considered to be a leading bank when it maintains the primary depository bank account of the debtor and initiates the syndicated loan.

With respect to other multi-investor loans, one of the investors is appointed as a leading bank. Uzbek law does not impose any particular requirements as to rights, obligations and functions of the leading bank and common rules governing agency agreements apply.

The leading bank, being an agent of the investors, acts as an intermediary and a representative of investors and is mostly unable to perform any legally significant actions in its own name, for example, to dispose any entrusted property. Responsibilities of the agent are not fiduciary in nature, but consist of due performance of its functions under the contract. The agent is remunerated with agent fees set in the relevant agreement concluded between the investors and is to be reimbursed against all losses incurred in the course of performing its functions.

Note that the concept of trust is alien to Uzbek law.

7 Describe the primary roles and typical fees of the financial institutions that arrange...