The Russian Law on Syndicated Loans* (the “Law”), which is intended to close the last legal loopholes in the regulation of loan syndication in the country, came into force on 1 February 2018.
The possibility of providing syndicated loans under Russian law has been under discussion for a long time. Finally, in 2015, the Association of Regional Banks of Russia prepared the Russian standard documentation for syndicated loans. The Law confirms the current market practice in this field, provides for detailed requirements for the relevant documentation (taking into account the established international market practice) and closes some other legal loopholes in the current legislation.
The Russian banking and financial community has long been waiting for the adoption of this Law. The financial community sees the Law as the milestone that will make syndicated loan transactions available for smaller local players (presently, participation in loan syndicates is reserved mostly for large state-owned banks). Such transactions are likely to become even more widespread especially in the current foreign policy context and market reality.
The legal nature of a syndicated loan: a set of independent bilateral loans
On the international market, a classical syndicated loan is a set of individual bilateral loans granted by a syndicate of creditors to one borrower on similar terms and conditions under the same loan agreement to which they are all parties. Loan syndicate participants are not regarded as joint creditors.
The Law confirms this legal nature of a syndicated loan agreement. According to the Law, several creditors that constitute a syndicate undertake to provide the borrower with funds in concert with each other. At the same time, each participant of the syndicate of creditors is not responsible for the performance by other creditors of their obligation to provide the loan. Each creditor has independent rights of claim in relation to the borrower that do not depend on the rights of claim of the other syndicate participants.
A syndicated loan agreement is a mixed contract and includes, in addition to the obligations of the borrower and the creditors in relation to each other, the obligations associated with servicing and repaying the loan that arise between the creditors. These include the terms of the procedure for the creditors to make decisions on the performance of the contract, the obligation for organising the process for granting the loans and/or on management of security (pledges).
Creditors under a syndicated loan agreement
The Law expressly stipulates that creditors under syndicated loan agreements (the “Syndicate Participants”) are not only Russian credit institutions, but also foreign banks, international financial organisations, non-government pension funds, investment funds management companies and non-government pension funds management companies as well as Vnesheconombank.
The role of a facility agent
A syndicated loan agreement must provide that one of the Syndicate Participants, the “facility agent”, exercises the rights of creditors under the syndicated loan agreement. The facility agent can be a Russian credit institution, Vnesheconombank, a foreign bank or an international financial institution. The rules on the contract of commission apply to the obligations of the facility agent in relation to the other creditors.
In particular, a facility agent:
- maintains a register of the Syndicate Participants and records the funds provided to the borrower;
- receives payments from the borrower under the agreement and distributes the funds received among the Syndicate Participants;
- sends messages to the borrower and creditors;
- receives documents and information and transmits to the other parties;
- presents to the borrower the demand for repayment of the funds it has received; and
- performs other functions in accordance with the agreement.
The borrower’s obligations to creditors are terminated at the time of transfer of funds to the facility agent. At the same time, the other creditors cannot exercise their creditor rights before the termination of the syndicated loan agreement or until the condition for the exercise of creditor rights by the facility agent is cancelled. A syndicated loan agreement may provide that the facility agent may take some actions only after securing prior consent of all or a majority of the Syndicate Participants. The payment of the remuneration to the facility agent, as well as the reimbursement of its expenses, is carried out by the Syndicate Participants (unless otherwise provided for by the agreement).
The role of a security agent when registering pledges
The management of pledges and/or collaterals on behalf of and in the interest of all the creditors plays an important role in syndicated lending. The provisions on the security agent are contained in Article 356 of the Russian Civil Code. However, before the adoption of the Law, the current regulation did not expressly allow the security agent to be specified in the pledge registers as a representative of the pledgees and also to transfer to it the appropriate rights relating to the registration of the pledge.
The Law amends a number of laws under which the details of the agreement on the management of pledges and the security agent are indicated in the relevant pledge registers upon the registration of the pledge securing the obligations under the syndicated loan agreement. If a syndicated loan agreement contains a pledge management clause, the information on the syndicated loan agreement is indicated. The relevant pledge registers are the Register of Notices on the Pledges of Movable Property (which will only contain the information on the security agent, but not the pledgees), the Unified State Register of Legal Entities in relation to pledges of shares and the Unified State Register of Immovable Property.
Notifications and applications for making amendments to the pledge registers are also made by the security agent.
The syndicated loan agreement may provide that the rights and obligations of the security agent are vested in the facility agent.
The Syndicate Participants’ decision-making procedure
According to the Law, a syndicated loan agreement must contain a clause that will outline the procedure by which the creditors can take decisions and fulfil their obligations with respect to the borrower (an intercreditor agreement). In particular, the agreement may establish that all the Syndicate Participants or a majority of them take decisions on the following issues:
- exercise or waiver of certain rights by all the Syndicate Participants;
- performance of certain obligations by all the Syndicate Participants;
- -notification of the borrower about the repudiation of the syndicated loan agreement or a request to modify or terminate it;
- election of the facility agent from among the Syndicate Participants.
The rules of Chapter 9.1 of the Russian Civil Code (on the decisions of meetings) apply to the Syndicate Participants decision-making procedure, unless the agreement provides for a different procedure. The decisions taken are mandatory for all the creditors who are Syndicate Participants.
Secondary syndicated loan market: assignment of creditor rights
The Law contains detailed provisions on the assignment of rights of a Syndicate Participant. This should contribute to the development of the secondary market for syndicated loans in Russia. If the agreement does not provide otherwise, a Syndicate Participant may transfer its claims towards the borrower (which arise from the fulfilled obligations of such creditor to provide funds) to any other person without the consent of the other Syndicate Participants (together with the right to participate in the Syndicate Participants decision-making procedure). A Syndicate Participant may also assign its obligation to grant a loan to another person, provided that the latter may be a Syndicate Participant in accordance with the Law. To simplify the procedure for selling a loan, the agreement may contain the borrower’s preliminary consent for a Syndicate Participant to assign the relevant obligation to another person.
The creditor making the assignment is obliged to notify the security agent and the facility agent about its decision, and the latter will make the relevant changes to the register of the Syndicate Participants and also notify the borrower of the assignment. The facility agent cannot transfer its creditor rights under the syndicated loan agreement until the termination of its authority as the facility agent.
In addition, a syndicated loan agreement may include a provision for its accession by new creditors. The agreement will be effective for such creditors from the moment of their accession.