Below we highlight key developments and challenges related to the new Russian law on syndicated facilities.
Federal Law No. 486-FZ “On Syndicated Facility (Loan) and Amendments to Certain Laws of the Russian Federation” (the “Law”) dated December 31, 2017, came into effect on February 1, 2018.
A draft version of the Law had been discussed for several years by legal and banking expert communities based on experience gained from various Russia-related syndicated facilities over the last 20 years. Indeed, syndicated facilities (many granted under English law where non-resident lenders are involved) have been common in the Russian loan market for many years, and certainly prior to the Law. There were also a number of Russian law syndicated facilities in later years based on general provisions of the Russian Civil Code and the parties’ intention to follow, where possible, LMA-based facilities.
Prior to the Law there existed notable uncertainty about many Russian law provisions, including those involving the independence of lender obligations (e.g., the borrower could consider claiming the full loan amount from any lender), voting by lenders, the role of the facility/security agent and treatment of its fees, the registration of the security package in the name of the security agent, the consent of the lenders to transfer their obligations, secondary market issues, participation agreements, and treatment in insolvency. The Law addresses many of these points, but unfortunately not all.
The Law establishes a solid legal framework for Russian law-governed syndicated facilities and gives parties broad discretion to agree on various aspects.
Among other significant elements, the Law introduces the notion of a syndicated facility in Russian law. It limits the scope of persons who may be involved as the parties – for instance by excluding corporate lenders or individuals as original lenders. Generally, each lender is responsible for granting its portion of the facility, and lenders owe no joint and several obligations. The Law recognizes not only the syndicated facility agreement, but also other finance documents such as the facility arrangement agreement and intercreditor agreements.
The lenders are represented by a facility agent, who is, generally, a member of the lenders syndicate. Any specific lender’s rights transferred to the facility agent may no longer be exercised by the lender on its own. The facility agent may also be appointed as security agent.
The Law offers helpful provisions on assignment/transfer of the facility, including: (i) the lender’s right to assign any time after funding the borrower; (ii) allowing facility agreements to include a borrower’s consent to a lender’s transfer of its obligations to another person even prior to a drawdown provided that the transferee complies with original lender’s obligations; and (iii) easy assignment of security packages over movable assets based on naming the security agent as the creditor upon perfection of the assignment.
Challenges to Think Over
Unfortunately, the Law does not include some important provisions proposed by the legal and banking communities when it was still in draft Law form. For instance, in contrast to some proposals:
- the Law notably limits the scope of persons who may act as a lender, thereby restricting access of other participants to the primary syndicated facility market. Some comfort may be sought in the ability of lenders to freely assign their rights after loans are disbursed to borrowers, but Russian courts have not yet determined whether this may be safely used as a structuring tool for, for example, involving corporate lenders in syndicated facilities.
- the Law provides that the fees of the facility/security agent are paid by the lenders (contrary to current international market practice). A transfer of this obligation to the borrower might lead to a conflict of interest as the agent acts on behalf of lenders (similar to a representative of bond-holders).
- exclusivity provisions under the Law do not strictly follow the approach of Russian anti-trust law requirements; they require additional attention and clarification.
- pledges of immovable property and participation interests (shares) in Russian limited liability companies still require naming each of the lenders – and not only the security agent – as the creditor, for instance, in the pledge registers.
- the status of syndicated lenders, the status and powers of the facility and security agent, and other aspects of syndicated facilities in a Russian borrower’s insolvency remain unclear.
The Law is certainly not the final stage of development of Russian syndicated facility legislation, but it represents a major step forward. We look forward to further development of Russian statutory law, official clarifications, and court practice on the subject.
By Vladislav Skvortsov, Partner, Noerr Russia
This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.