23 April 2020
We continue to do our best to review what is happening in Russia and other jurisdictions in view of COVID-19 pandemics. Here we cover the issues concerning the borrowers and the lenders under the existing loan agreements, as well as the new loan based rescue schemes.
Same as in many other countries, the Russian government introduced a set of measures to support the lenders, unable to continue serving their debts under the respective loan agreements because of the COVID-19 related substantial reduction or a total loss of income. The lenders, covered by the said measures, are aimed at both physical individuals and legal entitles.
Loan Restructuring - Legal Entities
On 3 April 2020 a new law entered into force: Federal Law No.106-FZ « On Amending the Federal Law "On the Central Bank of the Russian Federation (Bank of Russia)" and certain legislative acts of the Russian Federation regarding the specifics of changing the terms of a loan agreement, loan agreement " (further the "Law No.106-FZ"). Under s.7 of this law the legal entities basically became entitled to restructure their loans, i.e. to postpone the due payments to a later date. This right to postpone the payments has to be exercised by the borrower before 3 September 2020. It is important to remember, that s.7 does not apply to all the legal entities, affected by the pandemic, but only to the legal entities, which are part of one of the following industries:
1. Air transportation, airport related business activities, trucking.
2. Culture, organization of leisure and entertainment.
3. Sports and fitness activities and sports.
4. The activities of travel agencies and other organizations providing tourism services.
5. Hotel business.
7. Activities of continuing education organizations, non-governmental educational institutions.
8. Activities for the organization of conferences and exhibitions.
9. Activities to provide household services to the population (repairs, washing, dry cleaning, hairdressing and beauty salons).
Each company will only be able to rely on s.7 once. As one can see s. 7 of the Law No.106-FZ is quite limited in its application both in terms of the scope and the contents. Even those businesses, which are covered by s.7, will still have to pay both the interest and the principal sum in full albeit at a later point of time.
Business Loans - Legal Entities
Whilst a restructuring option, which is now available under s.7 of the Law No.106-FZ is only available to certain limited categories of companies, many Russian banks with a share of the state participation, now are offering the special rescue loan facilities to the middle sized and large companies, irrespective of the industry, in which they are operating. Having said this, according to the estimates of the Ministry of Economic Development of the Russian Federation, the loans to businesses are terribly slow. Out of a total of 3.5 thousand applications worth 24 billion roubles, so far, the banks approved the loans worth only of 1.5 billion roubles, and only 400 million roubles have now been provided directly to the entrepreneurs. The head of the Ministry of Economic Development M.G. Reshetnikov drew the attention of the banks' top management to this problem. The existing measures are not enough to provide a strong rescue mechanism to the businesses operating in Russia under the current conditions. Last week the Russian government announced that further measures will be introduced in consultation with the local business committees. We are monitoring the situation carefully and will provide further updates, as they become available.
Loan Restructuring - Physical Individuals
Same Law No.106-FZ, which governs the loan restructuring for the legal entitles, contains provisions, applicable to the physical individuals. The individuals also have been given the right to postpone the payments under their respective loan obligations. Such right is subject to several conditions:
1. Firstly, the amount of the loan or loan should not exceed the maximum amounts, specified in the Law No.106-FZ for the different categories of loans, based on their purposes.
2. Secondly, the borrower's income or the total income of the borrowers under one agreement must have decreased by at least 30% per month, compared to an average monthly income for 2019, prior to contacting the creditor with a request to postpone the payments.
3. Thirdly, a loan agreement must be entered before the Law No. 106-FZ came into force.
4. Fourth, a borrower cannot apply for a deferred payment if he has already submitted an application for a deferment in accordance with the provisions of Federal Law No. 76-FZ "On Amending Certain Legislative Acts of the Russian Federation Regarding the Features of Changing the Terms of a Loan Agreement, a Loan Agreement, which are concluded with the borrower - an individual for purposes not related to the implementation of entrepreneurial activity, and the obligations of the borrower for which are secured by a mortgage, at the request of the borrower. "
As one can see, for the physical individuals, same as for the legal entities, the obligations under the loan agreements are not reduced in any way, they can be postponed to a future date, which, of course, can be helpful, but may not be enough to save people from bankruptcies in the future. Again, same as with the legal entities, further actions are expected from the government to address this problem.
UK and other jurisdictions
Having checked the business rescue measures, which are in place in the UK, the USA and several other jurisdictions, including Hong Kong, Singapore and Cyprus, we saw that in all these jurisdictions the new loans, backed up by the governments in way one or another, are being introduced to help the business to survive through the quarantines.
In the UK, the Banking and Finance Coronavirus Business Interruption Loan Scheme (CBILS) was introduced for the smaller businesses. The CBILS is not limited to loans, but includes also overdrafts, asset finance, invoice finance. CBILS provides facilities of up to £5m. The government will provide lenders with a guarantee of 80% on each loan and will cover the first 12 months of interest payments for the businesses.
For the larger businesses with an annual turnover of over £45 million, the COVID Corporate Financing Facility (CCFF) was put in place. The Bank of England will buy the newly issued Commercial Papers from the eligible companies. The CCFF is not limited in size.
Whilst the funds were made available by the government, the banks are not quick to distribute them. According to one of the Guardian reports, only 1.4% of the applications under the CBILS were actually approved 
. Whether the situation will be get changed remains to be seen.
Apart from the CBILS and CCFF, the UK government also approved the Future Fund (£250m) to support the start-ups and another fund to support "the most R&D intensive small and medium size firms" (£750m). These two funds will start operating in May. Hopefully, they will provide much needed support to their respective targeted businesses efficiently.
On a Federal level, the US government introduced the Small Business Rescue Plan ($377 billion), which includes $350 billion in loan forgiveness grants to the small businesses and non-profits to pay salaries to their existing employees and to pay for other expenses, including rent, mortgage, and utilities. The remainder of $27 billion was meant to be distributed as follows: $10 billion had to go to the Small Business Administration ("SBA") emergency grants and provide for an immediate relief for the small business operating costs; another $17 billion were meant to cover 6 months of payments for the small businesses with the existing loans. However, on 16 April 2020 the Small Business Rescue Plan run out of funds.
Today a new bill was introduced. The White House and the congressional leaders finally agreed on a $484bn package, aimed at refuelling the original Small Business Rescue Plan fund.
The new loan rescue programs are getting introduced in many other countries. We are seeing them being put in place in Singapore, Hong Kong, other Asian countries, in western Europe. It is hard to say exactly to what extended the available loan schemes may and will be used by the businesses and to what extent they really can save the businesses from the insolvencies.
We will continue to monitor the legal changes, focusing on Russia and trying to deliver our updates in the context of what is happening in other countries too.
Marianna Rybynok, Senior Assiciate, Khrenov&Partners