The war in Ukraine has made sanctions front page news.

But if you are preparing to refinance your business, sanctions provisions in your funding documents could have serious consequences. We look at how to minimise these risks – and keep your funding timetable on track.

COULD SANCTIONS PROVISIONS RESTRICT YOUR LAWFUL TRADING ACTIVITIES?

Recent events in Ukraine and the ensuing sanctions have refocused lenders’ attention on the risks associated with sanctions. For lenders, risk exists at two levels – firstly, compliance and the reputational risks that they themselves face as a lender and secondly, the credit/business risk faced by their borrowers. Given the current heightened focus on sanctions, if you are preparing to refinance, you need to pay particular attention to the sanctions provisions you are likely to find in the funding documents. Why? Because these provisions could restrict your normal and lawful trading activities.

A BREACH COULD IMPACT ALL YOUR FUNDING ARRANGEMENTS

Sanctions provisions in funding documents are complicated – the devil is in the detail both in the wording of the document and the nature of your business as a borrower. Getting on the wrong side of these provisions can have serious consequences. For example, breach of the sanction clauses in a funding document will trigger a draw-stop and could lead to a demand for you to repay the funding in full immediately. There can be other consequences too. Often there is no option to cure a breach of sanctions provisions, so a breach could impact all your funding arrangements (and potentially other contracts too) through cross‑default provisions.

THE DIFFICULTY WITH LENDERS’ PREFERRED WORDING

As experienced advisers, we are familiar with the key components of lenders’ preferred wording. What we often see is that the preferred wording is too broad, capturing activities that are in fact lawful. One example of this is where a country is subject to sanctions but these sanctions relate only to specific activities.

CONSIDER PROPOSING BESPOKE SANCTIONS WORDING

So how can you protect yourself against the risks associated with sanctions if you are considering a refinancing? A key preparatory step is to map your trading relationships – people, businesses and countries – and understand which (if any) of these are the subject of sanctions. Remember that the sanctions imposed by different countries and authorities may differ in scope. Where you are conducting trade in countries that are subject to sanctions but these sanctions do not apply to the particular activities of your business, it is worth proposing bespoke sanctions wording to the lenders at the outset, together with a brief explanation of why this may differ from their “standard” wording.

KEY TAKEAWAY: BEING PROACTIVE CAN SAVE TIME IN THE LONG RUN

Experience tells us one thing above all else: a little proactivity when agreeing outline terms can help to avoid lengthy and frustrating negotiations later in the process with the potential to damage relationships and delay the funding timetable.

Look out for the next article in our ‘Financing your business: More flow, less friction’ series. This will look at issues to consider if you took out a CLBILS facility during the Covid-19 pandemic.