What risks do sanctions pose for borrowers and lenders?

What risks do sanctions pose for borrowers and lenders?
Following the Loan Market Association’s annual conference on 9 September 2014, Rae Lindsay, partner at Clifford Chance, explains what lawyers should watch out for when drafting sanctions provisions in loan documentation.

You mentioned at the conference that lenders are becoming more demanding in relation to due diligence and documentation in terms of sanctions. What sort of requests are you seeing lenders make?

Lenders have to get as comfortable as possible that:

  • they are not dealing with entities that are sanctions targets
  • the funds they lend won't be used for purposes that could potentially result in the lenders themselves committing a sanctions infringement

They also have to deal with the fact that sanctions can change in scope during the life of a facility. This means asking questions to borrowers about their business relationships and also seeking more information about the uses to which loans will be put.

Given the pace of developments, sanctions issues can emerge before the deal is signed that didn't exist at the time original terms were negotiated. Many lenders are also concerned about reputational issues as well as legal compliance. It has become a particularly challenging feature in the Ukraine/Russia context, where loan activity has specifically been targeted, both by the US and the EU.

Is there a standard definition of 'sanctions' in loan documentation?

No, although most definitions aim to cover similar ground. The definitions are not always limited to sanctions imposed by the jurisdictions with which the lenders and borrowers have the most direct connections.

As you said, representations and warranties relating to sanctions are often widely drafted and open to interpretational vagueness. What risks does this pose for both borrowers and lenders?

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About the author:

Meet Kate:

1. Banking & finance lawyer with experience in syndicated lending and project finance in London, Paris and Sydney

2. Likes yoga, DIY (although the output doesn’t generally reflect the input) and sunny climes

3. Thinks the law is very unlike how LA Law made it look

Kate is a solicitor specialising in banking and finance with particular emphasis on syndicated lending and project finance. She has acted for both borrowers and lenders on a wide range of finance transactions, often involving multiple jurisdictions.

Kate trained and qualified in the Debt and Derivative Securities team at Allen & Overy LLP. She later joined the Banking and Finance team at Freehills (now Herbert Smith Freehills) in Sydney. Most recently, she was in the Projects and Infrastructure team at Norton Rose LLP before joining LexisNexis. Kate is dual-qualified in England and Wales and New South Wales, Australia.