In the European loan markets, it is increasingly common for lenders to require their borrowers (and other "Obligors") to provide sanctions-related representations and undertakings (sanctions confirmations) in their facility agreements. Adam Pierce considers whether any pattern is emerging on their nature and scope.
What are sanctions confirmations for?
The primary purpose of sanctions confirmations is to help lenders avoid incurring liability under sanctions as a result of providing the facilities in question.
Many European lenders are as concerned, or even more concerned, about liability under US sanctions than under their own domestic sanctions regimes.
Although US sanctions are notoriously extra-territorial in scope, most will not directly bind lenders incorporated and acting outside the US. However:
- certain US sanctions (currently those relating to Cuba and Iran) also apply to non-US subsidiaries of US entities;
- parts of the current US sanctions regime on Iran are entirely extra-territorial;
- US staff who are US citizens will need to comply with US sanctions; and
- for US dollar lending, New York clearing of dollar payments is likely to bring any lender, wherever they are based, within the US sanctions regime.
Given the above, sanctions confirmations will usually incorporate a definition of "Sanctions" covering US sanctions and any domestic sanctions to which the lenders may be subject.
Sanctions confirmations have become standard on almost all US dollar denominated loans. The arguments for including these provisions in non-US dollar transactions are often not as strong. However, our experience is that many lenders' policies require the same kind of sanctions confirmations in at least some non-US dollar transactions too.
What are the standard confirmations?
The following are reasonably standard:
- Sanctions status. That no Obligor nor anyone controlling an Obligor is a targeted person, or located in a targeted jurisdiction under any of the relevant sanctions regimes (a Sanctions Target). Some lenders ask for these confirmations to apply to directors, affiliates or even all employees of Obligors. Where they do, there is often negotiation on whether this should be based on the Obligors' awareness.
- Use of funds. That the borrower will not use the loans to do business with a Sanctions Target. The risk here is lender liability for facilitating that business.
- Compliance with sanctions to which Obligors are subject. Many facility agreements now supplement the standard Obligor undertaking to comply with material, applicable laws with an unqualified undertaking to comply with all sanctions laws to which they are subject. This is different from most other sanctions confirmations, in that it focuses on the sanctions to which the Obligors are subject, rather than those to which the lenders are or might be subject.
What else are lenders asking for?
Some lenders also request these less common undertakings:
- No Obligor will service the loan with moneys derived from business with Sanctions Targets. Or instead, no Obligor will do any business with Sanctions Targets. In March 2014, the LSTA (the US loan markets industry body) published guidance suggesting neither of these undertakings was necessary for US lenders acting in the US. This makes it harder for non-US lenders to insist on their inclusion to address a US sanctions risk.
- The Obligors will maintain suitable procedures to ensure that they comply with the agreed sanctions confirmations.
- Breach of a sanctions confirmation being a mandatory prepayment event (rather than an event of default).
Can we expect a more settled market picture to emerge? There are a number of difficulties in arriving at a market standard approach. These include:
- The approach of many European banks to sanctions confirmations is at least partly driven by policy. It is therefore not surprising that their requirements differ and will continue to do so.
- Both borrowers and lenders may be subject to conflicting legislation which restricts the extent to which they can give, or take the benefit of, the types of sanctions confirmations referred to above. In particular:
- Many in the market are now familiar with the approach of German lenders to sanctions confirmations. To avoid German anti-boycott legislation, they will generally not take the benefit of sanctions confirmations to the extent they relate to US or other sanctions not directly in force in Germany.
- Any EU-incorporated company is subject to EU Regulation 2271/96/EC (known as the EU Blocking Statute), which prohibits those bound by it from complying with specified US sanctions (in particular US sanctions on Cuba) or "with any requirement or prohibition based on or resulting from" them. We are not aware of the EU Blocking Statute having been actively enforced in England. In practice, most lenders effectively ignored it in determining their sanctions policy. However, it could potentially affect the enforceability of sanctions confirmations.
With these factors no doubt contributing to the LMA's decision not to produce any recommended drafting for sanctions confirmations, their form and scope is likely to remain a focus of negotiation for the foreseeable future.