LMA Seminar: Sanctions issues in loan transactions—26 June 2014

LMA Seminar: Sanctions issues in loan transactions—26 June 2014

The LMA held an early evening seminar at Allen & Overy (A&O) yesterday on the topic of Sanctions issues in loan transactions. The crisis in the Ukraine has catapaulted concerns around the impact of sanctions on loan transactions to the top of the list for banking and finance lawyers and Ken Rivlin (A&O New York), Matthew Townsend (A&O London) and Maura Rezendes (A&O Washington) presented the enlightening session to a packed audience.

The seminar, which was broadly presented from the perspective of lenders, started by discussing the two main types of financial restrictions that lenders should be aware of - first, the obligation to freeze funds and economic resources of any person subject to a sanction (the sanction target) and second the obligation not to make funds or economic resources available, directly or indirectly to or for the benefit of the sanction target. The presenters brought out the potential breadth of the term 'economic resources' (which can include anything convertible into funds) and 'indirectly' which can catch eg directors and shareholders.

The seminar  moved on to discussing the difference between the EU and US sanctions regime, pointing out that the US regime, as well as being more vigilent about enforcement, is somewhat broader in scope than the EU regime with non-US persons falling within the regime if they cause a US person or entity to violate a sanction.

The presenters then moved on to discussing how the sanctions issue is being dealt with in loan transactions, although they emphasised that there is as yet no settled market position. The importance of conducting due diligence before embarking on the transaction was highlighted, with thorough diligence having the dual benefit of satisfying the bank's credit committee and internal policies as well as ensuring it has done everything possible to demonstrate compliance if a regulator wishes to go through its records.

The presentation then moved on to how the representations, undertakings and events of default in a loan agreement can be tailored where it is considered there is any sanctions risk. In relation to representations, it was suggested that the market was moving towards having standalone sanctions representations, rather than relying on the general representations as to eg compliance with laws. Whether the representation as to compliance with sanctions laws should apply to affiliates, employers, distributers and intermediaries was brought out as a key negotiating point and the benefit of including the wider application at least in the first draft in terms of teasing out any issues was also discussed.

The seminar moved on to discuss appropriate undertakings, including an undertaking not to use any proceeds to directly or indirectly finance the sanctions target, particularly important where the loan is granted for general corporate purposes. The potential difficulty of enforcing any contractual remedies given that the bank may not be permitted to receive monies once a borrower or its parent has been designated a sanctions target was also highlighted as an issue.

This post is intended to give a brief snapshot of a few of the issues covered by the seminar. However, due to the interest in this topic the LMA is posting a video of the entire seminar on its website so if any member of the LMA wishes to know the detail of what what covered they should keep an eye out for this.

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.