updated on 07 June 2022
QuestionHow can borrowers in finance transactions best protect themselves?
Previously, sanctions provisions contained within loan or facility agreements have tended to focus on protections afforded to a lender to mitigate against the risk of a borrower being or becoming subject to sanctions. Borrowers have traditionally been required to give certain representations and undertakings in facility agreements that operate to give comfort to the lender that:
The inception of the Russia/Ukraine conflict and the ensuing array of sanctions implemented against Russia have brought sanctions provisions within loan agreements back into the limelight. Due to sanctions being levied against a number of prominent Russian banks, borrowers are now equally concerned with ensuring that they have adequate protections against sanctioned lenders. The below are three key areas where a borrower might look to ensure it is sufficiently protected.
1. Lender transfers
In a syndicated loan, it is almost inevitable that the day one original lenders will not all remain lenders by the time the loan matures, as the underwriting banks will sell down some or all of the debt that they held initially in order to de-risk.
Lender transfers pose a significant risk for borrowers in an environment of rapidly evolving international sanctions as a transferee lender may be or become a sanctioned entity. Syndicated deals will often have an ‘approved list’ of lenders to whom transfers can be made without borrower consent and care should be taken to ensure that the approved list does not include entities currently or likely to be subject to sanctions. Borrowers should aim to retain as much control as possible over to whom transfers can be made, including the ability to remove a specified number of entities from the approved list periodically. Furthermore and most importantly, facility agreements should include an overriding restriction that prohibits any transfer of lender commitments to a sanctioned entity.
2. Payments to a sanctioned lender
A borrower will also want to ensure that any payment made to the lenders (including indirectly via an agent) does not include payment to a sanctioned lender where such payment is prohibited by applicable sanctions. Recent credit agreements have included an express carve-out from any payment obligations owed by the borrower to a lender if such lender is a ‘sanctioned lender’. Alternatively, an express permission may be included that the agent may hold funds in a separate suspense account until such point when the agent is permitted to make the payment to the relevant lender in accordance with all applicable sanctions. Once the payment is made to the agent, the borrower should be released of any further obligation to the sanctioned lender in respect of that payment.
Given the severe consequences for the lender of not being paid amounts due to it, lenders may suggest that they can be treated by the agent only as a sanctioned lender for the purposes of the credit agreement if they are in fact subject to applicable sanctions that render any payment(s) to them unlawful. This requires careful drafting and should be balanced against the borrower’s need for certainty over when a lender should be treated as a sanctioned lender.
3. Mandatory prepayments
A facility agreement will generally include a mandatory prepayment provision in the event of illegality, whereby a borrower will be required to repay any outstanding loans made by a lender in the event that it becomes unlawful for that lender to perform its obligations under the facility agreement. There is a risk that such provision would be triggered by a lender becoming sanctioned, requiring the borrower to prepay its debt at a time when it may not have the liquidity to do so. An express carve-out is preferable from a borrower perspective such that no mandatory prepayment shall be required as a result of a lender becoming sanctioned, and so the borrower is not contractually required to make payments in breach of sanctions. However, lenders may push back on this position out of concern that they could be required to maintain a commitment while not receiving the associated compensation. An express carve-out can also be included more generally that no default or other breach of the document shall be triggered as a result of a lender becoming a sanctioned lender.
Given the ever-expanding scope of sanctions, including sanctions applicable to banks and financial institutions with ties to Russia, the significance of negotiating these provisions is expected to continue and it is likely that a settled position has not yet been reached. However, it is clearly now an important consideration for borrowers to avoid directly or indirectly contravening applicable sanctions.
Jessica Carty is an associate and Anthony Nwokenna is a trainee at Weil, Gotshal & Manges (London) LLP.