Sanctions Provisions In Loan Agreements

On April 12, 2021 by heart

While it is understandable that lenders should seek to protect themselves from violations of economic sanctions resulting from the use of funds by a borrower in sanctioned activities, borrowers should consider whether provisions to achieve this objective can affect transactions authorized in the broadest sense. Even if a credit contract does not provide an explanation for compliance with sanctions in the past, it will likely include obligations as to how to proceed. Borrowers should carefully assess the terms of these provisions and consider whether they can create hard-to-manage obligations or risk an unintentional delay event. The use of funds by borrowers should be assessed by the sanctions pacts with respect to the direct and indirect use of resources and whether they are limited to the use of the lender`s resources or whether they extend to other funds in general. To this end, borrowers may also revise the definitions of sanctioned countries and persons or, in other ways, qualify agreements to allow for other transactions authorized by sanctions. This may help assure the lender that the borrower will not induce the lender to break penalties when it is not requesting the termination of a potentially significant activity. While in recent years European market players have become familiar with key risks, contentious areas and possible compromise positions, there are still no “standard” European contractual insurances and the Loan Market Association (LMA) has indicated that it does not intend to develop recommended sanctions provisions for its documentation of bid facilities. He considered this to be a difficult issue, given the complexity and range of issues and rules applicable to each lender, and that general guidance could be given. The exact wording of each representation and/or obligation is therefore settled on a case-by-case basis and depends on the transaction, the parties involved and the sanctions regime that the parties wish to address. The LMA also proposes that the parties consider whether amendments and waiver declarations regarding such provisions (if included) should be issues requiring the agreement of all lenders – something that some lenders are currently insisting on. The LSTA has adopted the following recommended provisions: lenders in the European market have a number of views on the appropriate scope of these provisions and each major bank will have established its own provisions. The broader safeguards envisaged by some banks reflect the scope of the legislative systems they must deal with, particularly where these lenders may be subject to different (or broader) sanctions regimes than their borrowers.

This dispute often arises from the difference between US sanctions (which are respected by most international lenders, but which may not directly affect the activities of borrowers based in the UK or Europe) and the sanctions that exist in the EU and other countries. In general, EU sanctions generally focus on individuals and organisations specifically associated with certain regimes and organisations, while the United States often takes a broader approach by combining national or sectoral sanctions with targeted denominations. Complications can also occur when the borrower`s “partners” are subject to sanctions pacts. Borrowers may have subsidiaries outside the United States that may not be subject to U.S. sanctions. For example, those working in the EU may be subject to “blocking” laws that effectively prohibit them from accepting certain US sanctions. “De minimis” exception: despite various sanctions bans to allow the United States

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