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To (Re)pay or Not to (Re)pay

  • Hong Kong
  • Banking and finance

21-04-2020

Hong Kong banks have been asked to provide small and mid-sized businesses with a 6 month repayment holiday. Who is eligible and what will the relief cover?

COVID-19 is affecting valuations, disrupting cash-flows and causing financial distress for many borrowers. In its latest response to the crisis, on Friday, the HKMA announced loan relief for small and mid-sized businesses in the form of a “pre-approved principal payment holiday scheme for corporate customers”. A number of Hong Kong’s banks have been preparing for this announcement for some time - Eversheds Sutherland assists several of them.

Highlights

 

  1. What does the scheme cover?: All loan principal payments falling due under a bi-lateral loan between 1 May 2020 (the Launch Date) and 31 October 2020 will be deferred for 6 months from the original payment due date, although exceptions will apply for certain types of facilities (refer to the following section).
  2. Who is eligible?: Eligible small to mid-sized corporates (SMEs), being (i) corporate borrowers that have an annual sales turnover of HK$800m or less on a per entity basis, (ii) which have no outstanding loan payments due for more than 30 days and (iii) which are not in the process of ceasing operations or declaring bankruptcy or liquidation.
  3. Which banks are participating?: The HKMA expects all Hong Kong’s AIs to participate – the 11 lenders in the Banking Sector SME Lending Coordinating Mechanism have already confirmed that they are participating.
  4. Do borrowers need to apply?: No – in order to ensure that the relief is made available quickly, the HKMA has made it clear that formal applications are not required from SMEs. Banks will begin to notify eligible customers by the end of April. SMEs will need to inform their bank within 14 days of receiving that notice if they intend to participate.
  5. Is consent from the HKMCI or the TID required?: No, consent is not required from either the Hong Kong Mortgage Corporation Insurance Limited or the Trade and Industry Department.

Exceptions

 

  1. Will all loans be covered?: No. The scheme covers bi-lateral loans only – syndicated loans are not covered. Loans financing the purchase of shares or other financial assets (for example, bank deposits) are not covered. Loan payments falling prior to the Launch Date are not covered.
  2. Does the payment holiday vary?: Yes. The payment holiday for trade facilities is 90 days, not 6 months. Self-liquidating loans (including those used to acquire inventory for example) may need to be repaid when the underlying payment has been received from the borrower.
Importantly, businesses should also be aware that interest payments are not covered by the scheme and so interest will continue to accrue and to be payable during the payment holiday. The deferment of loan principal repayments will increase the total amount of interest payable under their loan and potentially extend its tenor. Businesses will need to consider with their financial teams whether these adjustments are acceptable.

Next steps 

The HKMA will shortly release a list of FAQs in connection with the scheme. These will address a number of the questions that businesses will have. In the meantime, businesses should:

 

  1. talk to their financial teams – banks will begin to notify eligible customers before the end of April; businesses should start to consider now whether they will likely be eligible, the potential impacts for their business and whether they intend to participate
  2. talk to their guarantors and security providers – given the impact of the scheme on existing loans (refer to previous section), some banks will likely require confirmations from the existing providers of credit support that the changes are acceptable and that the credit support remains in place
  3. check that the original corporate approvals provide sufficient authorisation to enter into any documentation required in connection with the scheme
Move quickly! The Launch Date is imminent and SMEs will have only a limited time to accept following notification from their bank. Businesses should move quickly on these matters if they intend to participate in the scheme.