THE SANCTIONED LENDERS PROBLEM
RECENT EVENTS SUCH AS THE WAR IN UKRAINE AND THE DESIGNATION OF CERTAIN FINANCIAL INSTITUTIONS AS SANCTIONED ENTITIES HAVE CAUSED SPONSORS AND LENDERS TO RE-EVALUATE THE SANCTIONS PROVISIONS IN THEIR FACILITY AGREEMENTS . BY JASON FOX , PARTNER AND RORY WILSON , SENIOR ASSOCIATE , BRACEWELL ( UK ) LLP .
Anyone who has been involved in the negotiation of loan documentation in recent years – not just in the project finance arena but in the wider syndicated debt markets – will be well aware of the greatly increased attention banks place on sanctions clauses in loan agreements . These clauses are there to protect the banks , and entitle them to default the borrower , if a member of the borrower group – and very often its officers , employees , agents and sometimes others connected with the borrower group – become the subject of sanctions .
Following Russia ’ s invasion of Ukraine and the resultant sanctions on Russian banks and also against the backdrop of heightened political tensions between Russia and China , an issue that has not previously been focused on in loan negotiations is starting to attract some attention : what are the consequences for the borrower , the agent bank and the wider syndicate if a lender becomes sanctioned ? Historically , loan agreements have been silent on this , and this silence can result in outcomes that are not just very problematic for the borrower but may also be very problematic for the agent bank and the rest of the syndicate .
This article examines the issue of lenders becoming sanctioned as it has historically been dealt with , or perhaps more accurately overlooked , in loan documentation and considers how documentation could be adjusted to ensure there is a fairer risk allocation as between the parties and greater clarity on what should happen if a lender is sanctioned .
Imagine the following scenario : prior to the commencement of Russia ’ s war with Ukraine , a borrower incorporated outside of Russia and which has no business interests in Russia enters into a financing to develop a project . The facility agreement , as is typical , includes various sanctions representations and covenants to be given by the borrower – with an event of default for any breach of these . The facility provides for a staggered drawdown period to fund the development , depending on certain project development milestones being reached . The facility has a broad international syndicate of lenders backing it . The first milestone is reached , and the borrower has nearly achieved the second milestone , following which it will submit a utilisation request to draw funds for the next stage of the project development . Russia then invades Ukraine and one of the Russian banks lending to the project is sanctioned . Depending on the drafting of the facility agreement , some or all of the following consequences could occur :
• The borrower and the agent bank would be prohibited from receiving from the sanctioned lender that lender ’ s committed portion of further loan drawdowns .
• The payment by the borrower of any amount interest or principal to the sanctioned lender would be prohibited . Yet refusal by the borrower to make a payment required under the terms of the facility would result in a non-payment event of default .
• The now illegal performance of the borrower ’ s obligation to pay the sanctioned lender and the sanctioned lender ’ s obligation to fund the borrower would quite likely create breaches of representation by the borrower if the facility includes typical representations that all authorisations required for the exercise of rights or performance of obligations under the finance documents have been obtained and that the performance of the transactions contemplated by the finance documents will not violate any sanctions and other transactions . Breach of these provisions would result in an event of default .
• There would likely be additional events of default on the basis of unlawfulness / unenforceability of the facility agreement in relation to payment obligations from or to the sanctioned lender .
• The occurrence of the events of default referred to above would give every lender a right to drawstop further drawings by the borrower of its facility .
• Even if no event of default occurred as a result of the relevant lender becoming sanctioned , and the borrower was able to submit further utilisation requests , the borrower and the agent will not be able to receive funds from the sanctioned lender thereby creating a project funding gap . This is problematic for the borrower , as its project will not be fully funded , and non-sanctioned lenders as they are lending to a non-fully funded project .
• To rub salt in the borrower ’ s wounds , the fact that it would be illegal for the sanctioned lender to fund the borrower would trigger the illegality
68 Project Finance International January 17 2024