What are the consequences if a lender in a syndicated loan agreement is sanctioned?

Taken together, these represent seismic legal changes, with new measures and targets being announced almost every week since late February. There has been extraordinary coordination between many sanctions authorities, but due to differences in their legal systems, as well as differing policy considerations, there is an array of overlapping but subtly different measures. Certain sanctions do not take effect immediately. For those that do, there sometimes exist general licences which allow certain transactions with certain otherwise sanctioned entities to continue. In particular, there are general wind-down licences which allow transactions that would otherwise be prohibited to be wound down by a certain date.

As with other financial markets, participants in the syndicated loans market have found it difficult to keep up with developments. Given the severe consequences that can arise for those not complying with all applicable sanctions, the apprehension that we have seen on loans involving any party which is subject to sanctions is understandable. However, parties should proceed with caution given that a failure by a party to perform its obligations under a finance document may result in contractual claims against it, in particular if applicable sanctions do not in fact prohibit such performance.

Most facility agreements will contain references to sanctions. However, these have historically tended to focus on the consequences of an obligor becoming a sanctioned entity or otherwise breaching sanctions. Few facility agreements expressly address the consequences of a finance party becoming subject to sanctions. We expect this to change going forward.

This note does not detail the specific sanctions rules but rather highlights some issues that have arisen in the syndicated loans market where lenders have become subject to sanctions:

If a borrower pays an amount to the agent of the lenders in accordance with the payment mechanics clause of the facilities agreement, in most cases it will have discharged its payment obligation in accordance with the terms of the contract. The fact that the facility agent is unable to pass on the portion of that amount that a sanctioned Lender would otherwise be entitled to, because sanctions prevent it from doing so, should not result in a payment event of default. The agent is the agent of the lenders not the borrower.

Illegality mandatory prepayment – the LMA standard wording states that a lender's commitments will be cancelled, and utilisations owed to it will be prepaid, if "in any applicable jurisdiction it [is or] becomes unlawful for a Lender to perform any of its obligations… or to fund, issue or maintain its participation in a Utilisation…". Whether or not this provision is triggered with respect to a sanctioned Lender requires a careful fact-specific analysis but it is not necessarily triggered solely because a lender becomes subject to sanctions.

Defaulting lender – some deals contain the LMA's 'Defaulting Lender' wording. Whilst this does not expressly refer to a Lender being sanctioned, certain European subsidiaries of Russian banks (for example, Sberbank Europe AG in Austria and its subsidiaries in Croatia and Slovenia) have entered into bail-in proceedings which should result in them being a Defaulting Lender. Of course, the consequences of being a Defaulting Lender are usually disenfranchisement from voting and not being entitled to receive a commitment fee, so this is not a complete solution but may be worth considering.

Voluntary cancellation and prepayment – to the extent that a general licence permits the wind-down of existing transactions prior to a certain date, borrowers may be amenable to prepaying loans owed to, and cancelling the commitments of, sanctioned lenders within that wind-down period. However, to do so will usually require the consent of the other lenders in the deal. This is often a unanimous lender consent matter.

Location and currencies involved – as noted above, the sanctions rules are not identical in all jurisdictions. As such, a careful fact-specific analysis is required for each transaction. It is important to analyse which sanctions apply and which may not apply.

Agency role – where a sanctioned lender exists in a syndicate, it is often clear that the agent cannot process payments to or from that lender. However, the sanctions regimes are usually very broadly drafted, meaning that other, non-payment related agency functions (for example, processing an amendment or waiver request) may also be a breach of sanctions where sanctioned lenders remain in the transaction.

Where the parties to any facilities agreement are now subject to sanctions, the parties should seek specialist external counsel advice as soon as possible, as well as the necessary internal sign-offs, before taking actions relating to such sanctioned entities. In some cases it will be necessary or advisable to notify, or even to obtain deal specific licences from, the relevant sanctions authorities. The consequences for failing to comply with sanctions are well documented and severe. Participants in the syndicated loans market should continue to proceed with caution.