The National Bank of Serbia (“NBS“) Has published interpretative guidance on the application of foreign exchange regulations to certain cross-border transactions. Among other things, the guidelines answer the question of whether Serbian resident A can pledge a claim owed to him by Serbian resident B (national claim) for the benefit of a non-resident C.

While acknowledging that “legally speaking, the transfer of claims and the granting of the pledge are two distinct concepts”, the NBS states in its response that the rules on the transfer of claims should also apply to the granting of the pledge. pledge, with the consequence that under Serbian law entities cannot pledge their national claims to a non-resident. According to the SNB, this is so because the execution of the pledge would have the “same economic effects” as if the Serbian resident transferred his pledged claim to a non-resident, since it would convert a national claim into a claim due to a non-resident. -resident. -resident, “leading to the increase in the external debt of Serbia”.

Such reasoning is legally and economically flawed for the reasons we develop below. NBS’s new position could have implications for the ability of Serbian borrowers to secure their cross-border financing.

General rules on debt transfers

The Foreign Exchange Law allows Serbian companies to transfer their receivables to non-residents only if the receivables arise from the sale of goods and services to non-residents (i.e. trade credit to the export) or loans to non-residents. The transfer of receivables, when authorized, should be documented in the agreement containing, among other details, the exact amount of the transferred receivable. This means that it is not possible to transfer future and contingent receivables whose amount is unknown, even if their legal basis and other elements are determined or determinable.

Collateral on receivables

The Foreign Exchange Law allows Serbian companies to guarantee their loans abroad, without limiting the type of guarantee that can be given. It was therefore considered that the granting of security on receivables in the form of a pledge or a guarantee contract governed by foreign law similar to a pledge is authorized. From a balance of payments point of view (which is the main objective of foreign exchange regulation), the granting of security on receivables is a neutral transaction in that the payment by the debtor of this receivable to the lender non-resident would decrease automatically and pro tanto. foreign liability of the resident borrower. In this sense, NBS’s reasoning behind its position described above is flawed.

The guidance does not explicitly address the scenario in which a Serbian resident A engages or otherwise grants security in a claim owed to it by non-resident B for the benefit of non-resident C. Account Given the position of the SNB, this debt guarantee is akin to an outright transfer of debt, it is now doubtful whether NBS also considers that only the pledge on debt resulting from a cross-border trade or a loan by a Serbian company to a non-resident is allowed. Such a position would not be justified because the described promise does not create new external debt. On the contrary. in an execution scenario, a resident’s cross-border claim against a non-resident debtor would effectively be offset against the resident’s debt to the non-resident lender.

Shortcomings and implications of the new SNB position on debt collateral

NBS’s position contradicts the long-standing practice of obtaining cross-border finance in the market. Many projects rely on the cash flows generated by contracts with residents and non-residents who are not importers of goods and services from the project company. To be bankable, these projects provide the lender’s security on these cash flows. However, if the NBS position described above remains, the project company would not be allowed to provide a guarantee. among others, the following claims: a) on bank accounts; (b) for insurance products; (c) under EPC contracts with a domestic or foreign contractor; (d) as part of the EPC performance and prepayment guarantees; (e) under hedging agreements; (f) for lease payments. Such restrictions can effectively interrupt the flow of new, high-value projects, thus hurting the economy. Moreover, there is no political reason for such a restrictive position of NBS because the granting of a pledge on local claims in a cross-border context does not have the “same economic effects” as the pure transfer. and simple of domestic claims to a non-resident and would not lead to “Increase in external debt of Serbia”. The execution of the pledge results in the payment by the debtor of the pledged claim to a foreign manager, which in turn leads to decrease the external debt of the pledgee. Economically, the operation has the same effect as if the pledgee collected the debt from its debtor and then used it to repay its external debt.

The SNB’s “guidelines” do not constitute the law, but may have a negative effect on the ability of local pledged debtors to transfer money to a foreign pledgee because Serbian banks refuse to make cross-border transfers. which NBS interprets as prohibited.

In view of the potentially serious implications for existing and future transactions and the lack of legal and economic justification for the position of the SNB expressed in the published guidelines, the SNB should refine its position and clarify that the granting of a guarantee on claims in a cross-border context is allowed. subject only to general restrictions on the granting of warranty. In the meantime, borrowers and lenders may want to check their loan documents to assess whether and to what extent the new SNB position affects their secured loan operations.