Sanction Clause In Loan Agreement
The credit market organization (hereafter referred to as LMA) has not issued any sanction provisions recommended in its facility agreements. In 2014, the LMA recommended in its guide to consider an assertion that the borrower was not the target of sanctions and an obligation to comfort lenders so that they would not in any way use the proceeds of the loan that would be contrary to the current sanctions system. The LMA notes that the exact wording of such representation and obligation depends on the transaction, the parties involved and the sanctions regime that the parties wish to address. Unfortunately, today, many lenders, regardless of the borrower`s situation, ingest much broader penalty clauses in all credit contracts. Unfortunately, it is difficult to negotiate sanctions. Lenders often argue that the proposed wording for the bank or banks is standard formulation and that it is not possible to make variations. Although this argument is used, negotiation is still possible. It is important to keep in mind that there is no consensus on market sanctions requirements; Each bank has its own sanctions policy and its own preferred formulation in lending contracts. The Bank`s standard sanction text, which acts as a documentation officer, is often used as a starting point for the formulation of sanctions. Other lenders in the syndicated or clubbed transaction may then add additional requirements to comply with their internal procedures.
Sanctions clauses may therefore have dual requirements and may be rather restrictive for the borrower. However, if the proposed wording is viable or too cumbersome for the borrower, even companies with limited bargaining power can negotiate the sanction clauses in order to become more feasible. Although there is no market consensus on the formulation of sanctions in loan contracts, there are many similarities between the sanctions demanded by lenders. The terms of sanction are generally included in the following sections (LMA) of the loan agreement: definitions, representations, general agreements, information pacts and cases of delay. When negotiating sanctions, it may be necessary to negotiate the following: applicable sanctions, scope of compliance, sanctioned person, investigation of sanctions, use of credits, use of bank accounts, compliance procedures, significantness and consequence of violation of sanctions obligations. The following paragraphs deal with each of these topics. This notice of practice describes some common financial commitments used in commercial financial transactions, including: `Minimum Value Test`- Leverage Compensation Report (or leverage ratio) – current ratio (or acidity test ratio) `Cash flow ratio`, interest hedging ratio and credit-to-value ratio, enforcement of sanctions legislation is an important issue in the credit documentation. In the face of increased sanctions legislation, increased enforcement measures and huge potential fines, lenders are increasingly insisting on strict clauses to ensure that borrowers comply with sanctions legislation. While sanctions were not a problem at all a few years ago, lenders currently include sanctions-related representations, general alliances and information pacts in credit contracts.
Many lenders fear reputational risks when a customer breaches penalties and lenders tend to devise more restrictive and comprehensive sanctions clauses than the sanctions laws that apply to the borrower or even the lender itself.