SANCTIONS AND PROJECT FINANCE provisions in the facility agreement entitling the sanctioned lender to cancel its commitment and call for immediate repayment of all amounts owed to it with which the borrower would not be able to comply even if it had the funds to do so because payment to the sanctioned lender would breach sanctions .
• Failure by a sanctioned lender to fund a utilisation would result in the sanctioned lender being deemed to be a defaulting lender under the standard LMA drafting , which could also result in the borrower being required to provide cash cover to any relevant fronting bank of standby letters of credit issued under the facility in relation to that lender ’ s participation in such letters of credit .
Obviously , the consequences set out above are not in the interests of the borrower – who is the unwitting victim of a lender being sanctioned – nor in the interests of the rest of the lenders of the syndicate or the facility agent ( or any other relevant agents of the lenders , such as any security agent ). Therefore , all parties would benefit from mechanics being built into the facility agreement from the outset that address the risk of a lender becoming sanctioned by ensuring that :
• The borrower would not be in breach of the facility agreement by virtue only of a lender becoming sanctioned ;
• There is a regime in place to modify payment / payment transfer obligations for the borrower and the facility agent to take account of what is and is not permitted by law when a lender is sanctioned ; and
• The borrower has a right to replace a sanctioned lender to avoid any funding gap on account of the sanctioned lender ’ s commitment to fund not being performed .
There are a number of different provisions that could be written into a facility agreement to implement these principles :
• The ideal for the borrower would be to negotiate a blanket overriding clause that provides that : ( i ) notwithstanding any other provision of the facility agreement , no representation by the borrower will be breached and no event of default will occur as a result only of a lender becoming sanctioned , and ( ii ) the borrower will not be obligated to perform any obligation that would breach sanctions . The alternative , which would arrive at the same place though with more precision , would be to specifically address all the relevant provisions – ie representations , covenants , events of default , drawstop etc – and ensure that the fact of a lender being sanctioned would not result in breaches or default by the borrower .
• Provisions addressing the borrower ’ s obligation to pay interest and repay principal to a sanctioned lender could be adjusted . Clearly such payments cannot lawfully be made but equally it would be an odd result if the borrower did not at least have to provide for the payment . There are a variety of ways this could be addressed such as providing that the borrower should pay amounts owed to a sanctioned lender into a blocked account and that payment will discharge the relevant payment obligation . If and when the relevant lender ceased to be sanctioned then amounts from that account would be transferred to that lender .
• If there is a project funding test that is run at intervals during the tenor of the facility , the parties may agree that there will be a grace period if there is a funding gap as a result of a lender becoming sanctioned before any breach of the funding test occurs . During that grace period no event of default would occur , and further utilisations would not be drawstopped .
• The right of a lender who becomes sanctioned to rely on standard illegality mandatory pre-payment clause to cancel its commitment and require its loans to be pre-paid could be disapplied .
• A right to designate a sanctioned lender as a defaulting lender could be introduced , which would then permit the borrower to require that lender to transfer its commitments to a new lender , if this is practically possible , which it may well not be , or otherwise cancel that lender ’ s available commitments and appoint a new lender to assume that lender ’ s cancelled commitments . If there is a revolving credit facility that forms part of the facility , the sanctioned lender / defaulting lender ’ s loans would be termed out . In addition , the sanctioned lender / defaulting lender would be disenfranchised from voting .
• If the facility includes a standby letter of credit component , and the borrower would otherwise be required to provide cash cover to the fronting bank as a result of a sanctioned lender / defaulting lender , the parties may consider including provisions for a negotiation period between the borrower and the fronting bank before any such cash cover is demanded in order to identify an alternative solution .
Recent events have served to remind us all that the issue of sanctions can apply as much to lenders as to borrowers and provisions in facility agreements should recognise that . The consequences of a lender becoming sanctioned could be ( at best ) highly disruptive and at worst catastrophic for the borrower and the nonsanctioned lenders .
To answer the question “ Sanctioned Lenders : Whose problem is it ?” the answer is that it is everyone ’ s problem and therefore the parties to a loan agreement should recognise that their interests are aligned in including provisions that address the risks associated with sanctioned lenders . There are a small number of facilities that have done just this , but general awareness of the issues and problems for all parties that come with a lender becoming sanctioned is low . •
Recent events have served to remind us all that the issue of sanctions can apply as much to lenders as to borrowers
Project Finance International January 17 2024 69