March 10, 2022 - On Wednesday, March 9th, the LSTA hosted a webinar, “Analysis of the Evolving US Sanctions on Russia and the Impact on the Loan Market”, presented by the Crowell & Moring sanctions team, Caroline Brown, Carlton Greene, Anand Sithian, Nicole Sayegh-Succar, and David (Dj) Wolff.
The current sanctions response to the war in the Ukraine represents unprecedented globally coordinated material actions. There have been similar sanctions imposed by the EU, US, and UK, but there are differences amongst them, with each jurisdiction having areas where their rules are the most restrictive. With those rules changing by the hour, loan market participants must be aware of the latest developments throughout each day.
There are four different categories of sanctions: geography-based sanctions, list-based blocking sanctions (where US persons are prohibited from processing any transaction and so the “property” may need to be held indefinitely), limited list-based or sectoral sanctions (here some transactions are permitted but others are not so care must be taken to know which are permissible), and activity-based sanctions. Most of the US Sanctions are administered by the Office of Foreign Assets Control of the US Department of the Treasury, and they will apply to US Persons, which include US entities, individuals resident in the US, and those who are physically present in the US. But non-US persons may also be subject to liability if they cause a US person to violate a sanction.
Sanctions typically prohibit US persons from providing funds, good or services to sanctioned persons or jurisdictions, or receiving these things from them. An example of current geography-based restrictions include the sanctions that prohibit US persons from exporting any goods or services to or from, or investing in, the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LNR”). (By way of background these are two unrecognized -states located in the Donbas region of the Ukraine. The area they occupy is recognized by the international community as part of the Donetsk and Luhansk oblasts of the Ukraine.) The sanctions together essentially impose an embargo on DNR and LNR. Of course, there are various general licenses authorizing wind-down activity, activity related to humanitarian services or government or intergovernmental work in these regions. For the syndicated loan market, scenarios where relevant sanctions could arise include: (i) a borrower’s use of loan proceeds in LNR/DNR; (ii) a borrower generates revenue from LNR/DNR and uses that to repay lenders; (iii) guarantors or borrowers are located in LNR/DNR.
Fortunately for the US loan market, it seems unlikely that a Russian bank would be a lender in a syndicate that has made a loan to a US borrower. However, LMPs should diligence their syndicates to ensure this is not the case. Today’s credit agreements may not include lender representations dealing with sanctions, and lenders do need to protect themselves. The following scenario reveals how parties will need to consider the many different relationships that could arise in our market. For example, loan market participants must consider not just the identity of lenders in their syndicate but also perhaps participants. If a lender has sold its loan to a sanctioned participant, for example, a blocked Russian bank, the borrower or the agent could indirectly violate a sanction if all or part of the interest or principal payment made to the lender is then passed by that lender to that Russian bank. Of course, as a practical matter, OFAC tends to focus on foreseeability. Thus, if the borrower had no reason to know that there was a sanctioned Russian bank among the lenders, then OFAC would be unlikely to enforce. However, in making such decisions, OFAC would look at whether the borrower took reasonable steps to guard against this possibility. For example, does the credit agreement include a provision to the effect that no sanctioned person can serve as a lender, or that lenders will not provide any interest payment to a sanctioned person. These are new issues for some lenders to consider, and the LSTA will soon circulate revised Sanctions Guidance that addresses those types of issues. Click here for the slides and replay.