"The interest rate is lower overseas. What else will the CROSS-BORDER LOAN cost?"

A Malaysian company receives an offer for a USD10 million facility from an overseas lender.

The proposed interest rate appears more attractive than the rates offered locally. The lender is prepared to finance the company’s regional expansion and has indicated that the funds can be made available within several weeks.

Management considers the commercial terms and decides to proceed.

The documentation process then begins.

The lender requests security over assets in Malaysia, a guarantee from the company’s foreign holding company and legal opinions from lawyers in three jurisdictions. Repayment must be made in USD, while most of the borrower’s revenue is received in RM.

The agreement also requires the Malaysian borrower to bear any withholding tax so that the lender receives the full amount stated in the repayment schedule.

The interest rate may be lower.

The true cost and risk of the financing, however, cannot be determined from the interest rate alone.

1. What makes a financing arrangement “cross-border”?

A financing transaction becomes cross-border when important parts of the arrangement involve more than one jurisdiction.

This may occur where:-

• the lender and borrower are incorporated in different countries;

• the facility is denominated in a foreign currency;

• the guarantor is located overseas;

• the secured assets are situated in several jurisdictions;

• repayment is made through foreign accounts; or

• the finance documents are governed by a foreign law.

A Malaysian company borrowing from its overseas shareholder may therefore be involved in a cross-border financing transaction even if the funds are used entirely within Malaysia.

Similarly, a Malaysian bank may provide financing to an overseas project supported by Malaysian security.

The structure determines which laws, approvals and documents must be considered.

2. The first issue is not the interest rate. It is whether the borrowing is permitted

Malaysia maintains a liberal Foreign Exchange Policy, but foreign-currency borrowing remains subject to rules that distinguish between the borrower, lender, currency, relationship between the parties and aggregate amount involved.

Bank Negara Malaysia presently states that a resident entity may borrow any amount in foreign currency from specified sources, including licensed onshore banks, entities within its group and its direct shareholders. Borrowing from non-resident financial institutions and other unrelated non-residents is subject to the applicable prudential limit, with prior approval required for transactions falling outside the published permissions.

The applicable position must be checked at the time of the proposed transaction because policies and thresholds may change.

The borrower should establish:-

• its residency status for Foreign Exchange Policy purposes;

• whether the lender is a shareholder, group entity, financial institution or unrelated party;

• the currency and amount of the facility;

• whether existing foreign-currency borrowings must be aggregated;

• how the proceeds will be used; and

• whether approval, notification or reporting is required.

This review should take place before the company signs a binding facility agreement - not when the funds are ready to be transferred.

3. A foreign-currency loan creates a currency exposure

Suppose the company borrows USD10 million when the exchange rate is RM4.00 to USD1.

The Ringgit value of the principal is RM40 million.

If the Ringgit later weakens to RM4.50 to USD1, the company will need RM45 million to purchase the same USD10 million, excluding interest and other costs.

The outstanding debt in USD has not increased. The RM cost of repaying it has.

This risk becomes especially important where the company:-

• earns primarily in Ringgit;

• has limited foreign-currency revenue;

• is borrowing for a long period;

• has narrow profit margins; or

• cannot pass currency increases to its customers.

A business earning in the same currency as its borrowing may have a natural hedge. Otherwise, the company may need to consider an appropriate hedging strategy with qualified financial advisers.

The cost of hedging should be included when comparing the overseas facility with a Ringgit-denominated facility.

A lower interest margin may cease to be attractive once currency risk and hedging costs are taken into account.

4. Which law governs the facility?

An overseas lender may require the facility agreement to be governed by English law, Singapore law or the law of another jurisdiction.

The Malaysian borrower may therefore sign an agreement governed by foreign law while granting security governed by Malaysian law.

For example:-

• the facility agreement may be governed by English law;

• a charge over Malaysian land will be governed by Malaysian land law;

• a Malaysian debenture must comply with Malaysian corporate and registration requirements; and

• a guarantee from an overseas holding company may be governed by the law of its place of incorporation or another agreed law.

No single lawyer may be able to advise on every document.

Counsel in each relevant jurisdiction may need to confirm that the parties have capacity, the documents have been validly executed and the security has been properly created and perfected.

This explains why cross-border financing often involves several sets of lawyers and legal opinions.

5. What is a legal opinion, and why does the lender require one?

A legal opinion is commonly issued by the borrower’s or lender’s counsel in the relevant jurisdiction.

Depending on its scope, it may confirm matters such as:-

• the company has been validly incorporated and remains in existence;

• it has the legal capacity to enter into the transaction;

• the necessary corporate approvals have been obtained;

• the documents have been duly executed;

• the obligations are legally valid and enforceable;

• the choice of governing law may be recognised;

• the security has been properly created; and

• required registrations or filings have been completed.

The opinion is not a guarantee that the borrower will repay the facility or that enforcement will always produce sufficient recovery.

It addresses defined legal questions and is subject to assumptions, qualifications and limitations.

Drafting and agreeing on its scope can take time, particularly where the lender requests opinions from several countries.

6. Security must be created under the law governing the asset

A foreign-law facility agreement does not by itself create effective security over Malaysian assets.

If the lender requires security in Malaysia, local documents and perfection steps may be necessary.

The security package may include:-

• a legal charge over Malaysian land;

• a debenture over the borrower’s assets and undertaking;

• an assignment of receivables or contractual proceeds;

• security over bank accounts;

• a charge over shares;

• corporate or personal guarantees; and

• an assignment of insurance proceeds.

• Depending on the asset and document, perfection may involve stamping, registration with the Companies Commission of Malaysia, registration at the relevant land office, notices to counterparties or control arrangements over accounts.

The financing timetable should allow sufficient time for these steps.

If security is also taken in another country, lawyers there must determine the required local process. A security document effective in one jurisdiction may not create any proprietary right over an asset located elsewhere.

7. Existing financiers may have priority

A Malaysian company seeking overseas financing may already have banking facilities secured by a debenture or charge over its assets.

The existing documents may contain:-

• a negative pledge;

• restrictions on additional borrowing;

• restrictions on granting further security;

• financial covenants;

• cross-default provisions; or

• a requirement to obtain the existing bank’s consent.

The new lender cannot simply be given security over assets that are already fully charged without considering the existing financier’s rights.

The parties may require:-

• consent from the existing lender;

• redemption of the earlier facility;

• release of existing security;

• a deed of priority; or

• an intercreditor agreement regulating enforcement and distribution of recoveries.

These arrangements should be identified at the term-sheet stage. Discovering them shortly before disbursement can delay or prevent the transaction.

8. A guarantee from another group company requires separate consideration

The overseas lender may ask the borrower’s holding company, subsidiary or sister company to guarantee the facility.

Management may view this as an internal group arrangement because all entities ultimately share common ownership.

Legally, however, each company is a separate entity.

The board of the proposed guarantor should consider whether providing the guarantee is within the company’s powers and consistent with its interests and directors’ duties. Corporate benefit, constitutional restrictions, existing financing covenants and applicable approval requirements may need to be examined.

Cross-border guarantees must also be reviewed under the relevant Foreign Exchange Policy rules. Bank Negara Malaysia publishes separate provisions addressing financial guarantees involving residents and non-residents.

A guarantee should not be signed merely because the lender describes it as part of its standard regional security package.

9. Withholding tax can change the economic cost

Payments of interest or other financing returns to a non-resident may have Malaysian tax implications.

Depending on the nature of the payment, the lender’s jurisdiction, the applicable tax treaty and any available exemption, the Malaysian borrower may be required to deduct and remit withholding tax.

The facility agreement may contain a tax gross-up clause.

Such a clause may require the borrower to increase its payment so that the lender receives the same net amount it would have received if no tax had been deducted.

For example, if the borrower is contractually required to pay USD100,000 in interest and tax must be withheld, the borrower may have to pay an additional amount rather than deducting the tax from the lender’s USD100,000 entitlement.

The borrower’s actual cost may therefore exceed the quoted interest rate.

The documents should address:-

• which taxes are covered;

• when gross-up applies;

• whether treaty relief must first be pursued;

• who prepares supporting forms;

• whether the lender must cooperate;

• what happens if the lender assigns the loan to another jurisdiction; and

• whether increased-cost provisions permit further recovery.

Tax advice should be obtained before the commercial terms are finalised.

10. How and where will the funds be disbursed?

The borrower should not assume that the full facility will be transferred directly into its Malaysian operating account.

The lender may require:-

• payment directly to a supplier;

• disbursement into a designated foreign-currency account;

• drawdown in separate tranches;

• evidence of expenditure before reimbursement;

• satisfaction of project milestones; or

• conversion through an approved banking channel.

Bank Negara Malaysia’s published rules generally permit foreign-currency payments between residents and non-residents for most purposes, subject to specified exceptions and the applicable Foreign Exchange Policy notices.

The company should confirm how the funds will enter Malaysia, whether conversion into Ringgit is required and what supporting documents its bank will request.

A facility may be legally available but still unusable on the planned date if the operational arrangements have not been prepared.

11. Conditions precedent become more demanding across several jurisdictions

Before drawdown, the lender may require:-

• board and shareholder resolutions;

• constitutional and corporate records;

• evidence of authority of each signatory;

• legal opinions from each relevant jurisdiction;

• completed security registrations;

• insurance endorsements;

• regulatory confirmations;

• tax forms;

• know-your-customer documents;

• evidence of the purpose of borrowing;

• existing lender consents; and

• confirmation that no default has occurred.

One missing document from an overseas shareholder, authority or security provider may prevent the entire drawdown.

The borrower should prepare a responsibility matrix identifying each condition, the responsible party and the expected completion date.

Commercial commitments to suppliers or contractors should not be made on the assumption that signing the facility agreement guarantees immediate access to the funds.

12. Cross-border compliance extends beyond foreign-exchange rules

An overseas lender will usually conduct enhanced due diligence on the borrower, its beneficial owners, source of funds and intended use of the facility.

The transaction may also be screened against anti-money laundering, counter-terrorism financing, proliferation financing and sanctions requirements applicable to the lender.

A transaction may be lawful in Malaysia but restricted under laws or internal policies applying to the overseas bank.

Particular attention may be given to:-

• the countries in which the borrower operates;

• counterparties receiving the funds;

• politically exposed persons;

• ownership through several jurisdictions;

• dual-use goods;

• sanctioned persons or industries; and

• payments involving higher-risk countries.

The borrower should provide accurate and consistent information. Differences between corporate records, bank submissions and contractual documents can delay approval or lead to further enquiries.

13. Where will disputes be resolved?

The agreement should state both the governing law and the forum for dispute resolution.

These are related but separate matters.

The facility may be governed by English law while disputes are submitted to the English courts. Alternatively, the parties may agree to arbitration.

The borrower should consider:-

• where proceedings may be commenced;

• whether it must appoint a process agent overseas;

• the language and cost of proceedings;

• whether interim relief is available;

• how a foreign judgment or award may be recognised in Malaysia; and

• whether local security can be enforced directly under Malaysian law.

A judgment obtained overseas does not necessarily result in immediate seizure of Malaysian assets. Recognition and enforcement procedures may still be required.

The enforcement route should be examined when the documents are negotiated, not only after a default occurs.

14. The lender may be allowed to transfer the loan

Cross-border facility agreements commonly permit the lender to assign or transfer its participation to another bank, fund or financial institution.

This may change the party receiving payments and could affect:-

• withholding tax;

• communication and administration;

• confidentiality;

• sanctions screening;

• voting among lenders; and

• future restructuring discussions.

The borrower should examine whether its consent is required, whether transfers are limited to specified categories of institutions and who bears any increased tax or regulatory cost arising from a transfer.

This is particularly important for long-term financing where the original lender may not hold the facility until maturity.

15. Events of default can arise in another country

The agreement may contain cross-default provisions extending beyond the Malaysian borrower.

A default by a foreign parent company, guarantor or material subsidiary may trigger a default under the Malaysian company’s facility.

Other events may include:-

• insolvency proceedings in any relevant jurisdiction;

• invalidity of a foreign guarantee;

• loss of regulatory approval;

• unlawfulness of repayment;

• breach of foreign-exchange rules;

• failure to maintain security;

• material adverse changes; or

• a judgment against another group member.

The borrower must understand how widely the default provisions extend across the group.

A Malaysian company that continues paying on time may still face acceleration if another group entity defaults under a separate obligation.

16. What should the company review before accepting the facility?

Before signing, the company should understand:-

• the identity and regulatory status of the lender;

• the permitted amount and purpose of borrowing;

• the currency of drawdown and repayment;

• its exposure to exchange-rate movements;

• the effective interest or profit cost;

• withholding tax and gross-up obligations;

• governing law and dispute forum;

• security required in every jurisdiction;

• guarantees expected from group entities;

• conditions precedent to drawdown;

• existing lender restrictions;

• registration and perfection requirements;

• assignment rights of the lender; and

• the events that may trigger early repayment.

A cross-border facility can provide access to larger funding pools, competitive pricing and international business opportunities.

It also creates legal, regulatory, tax and currency issues that may not arise in a purely domestic facility.

The right comparison is therefore not:

“Which bank is offering the lowest rate?”

It is:

“What will this financing require from the company - from the date of signing until the final security is released?”