Russian Federation: Syndicated Loans March Ahead

Federal Law No. 486-FZ on Syndicated Loans and Amending Certain Legislative Acts of the Russian Federation dated 31 December 2017

Russian authorities have been looking to regulate syndicated lending for some time. With Russian companies and financial institutions suffering from limited access to foreign debt markets, economic development depends significantly on the effectiveness of domestic financial models. The syndicated financing model, whereby funds are provided by a group of lenders (the eponymous "syndicate"), offers substantial growth potential. To that end, the government determined that it is vital to improve the legal regulation of syndicated lending transactions.

Revolution or evolution?

A new Syndicated Loan Law took effect on 1 February 2018; it was passed specifically to establish clearer rules on syndicated loans.1

Notably, loans have long been issued on this basis by groups of Russian banks under syndicated loan agreements based on general civil law provisions governing agency, contracts, credit relationships and obligations. Russian banks have also actively participated in cross-border foreign (e.g. English) law governed syndicated loans.

Nevertheless, there was legal uncertainty regarding this contractual structure under Russian law before the enactment of the Syndicated Loan Law. For example, there was a risk of the relationship between the lenders (the members of the syndicate) being treated as a partnership or joint venture, and a corresponding risk that the syndicate would be subject to rules on partnerships. If so, the borrower could assert claims against one member of the syndicate for the total amount of the loan being provided by all members. In addition, the special rules for partners' withdrawal from a partnership would surely complicate the creation of a secondary loan market, and the mandatory rules on partners' conduct of business would limit lenders' flexibility in decision-making. With that in mind, to eliminate legal risks, most syndicated lending transactions have been structured with conventional standard form agreements governed by the laws of foreign jurisdictions. (e.g. English law).

The new law helps to remove these uncertainties from relationships in Russia between lenders, to establish procedures for their cooperation and decision-making and to impose certain restrictions (along with rights and obligations) on the parties to a syndication. At the same time, the Syndicated Loan Law represents an evolutionary development of the existing legal regulation of syndicated lending, adopting current regulatory approaches and reflecting established practices.

The syndicated loan agreement: form and content

A syndicated loan agreement records the lenders' obligations in relation to the provision to the borrower of funds in the amount, and within the terms, provided for each particular lender in the agreement, as well as the borrower's corresponding obligations to repay the loan and pay interest and other charges (if applicable).

A syndicated loan agreement is a hybrid contract. In addition to the actual loan agreement provisions, a syndicated loan agreement usually features elements of a mandate agreement, a syndicated loan origination agreement, a collateral management agreement and an intercreditor agreement.

The lawmakers' approach to regulating the relationships among the parties to a syndicated loan agreement is distinguished by broad discretion and flexibility. For example, a syndicated loan agreement absolutely must contain a provision on the procedures for decision-making by the lenders and their performance of duties vis-à-vis the borrower and other persons in connection with providing the loan to the borrower and the servicing and repayment thereof. At the same time, the lenders can add specifics to the decision-making by syndicate members that differ from the general civil law rules on the decisions taken at meetings.2 Decisions adopted by the lenders in this manner are binding on all members of the syndicate. The fact that lenders can independently distribute risks among themselves under a syndicated loan agreement makes this new contractual instrument more attractive to participants in the Russian market.

A syndicated loan agreement naturally must be executed in simple written form; failure to comply with this requirement renders the agreement void. There are no notarization or registration requirements.

The parties to a syndicated loan agreement

Under the Syndicated Loan Law, only legal entities and sole proprietors can receive syndicated loans.3

The law allows the following the lenders to provide syndicated loans:

  • credit institutions and Vnesheconombank (VEB);
  • international financial institutions, foreign banks and other legal entities authorised to grant loans;
  • non-state pension funds (NPFs), management companies of investment funds (IFs), open-end funds (OEFs) and NPFs, specialized depositories of IFs, OEFs and NPFs;
  • other Russian legal entities to the extent provided by federal law. For example, special-purpose vehicle (SPV) project companies, Far East development institutions4 and state industrial development funds5 can act as lending syndicate members.

The Syndicated Loan Law significantly expands the range of entities eligible to lend, compared to the original version of the bill. However, the law limits the ability of non-credit financial institutions to be directly involved in syndicated lending, which is at odds with global practice.

In addition to the lenders and the borrower, the parties to a syndicated loan agreement may also include a syndicated loan arranger and collateral manager. These can be either syndicate-member lenders or third parties. But only entities entitled to participate in a syndicate can be arrangers,6 while any commercial organization or sole proprietor can act as a collateral manager.7

Role of the loan manager (financing agent)

When considering the interaction between the lenders and the borrower, the figure of the loan manager – which is appointed by the lenders and performs its duties for a separate fee – is especially important.

Since the loan manager performs its duties to the other syndicate members pursuant to orders from the latter, it does so in their name and on their behalf. Among other things, the loan manager exercises the following rights of the lenders:

  • presents the borrower with collection notices under the syndicated loan agreement;
  • sends any legal communications to the borrower and third parties;
  • receives funds from the borrower or third parties as performance of obligations under the agreement, keeps a record thereof and distributes them among syndicate members;
  • provides documents and information received from the borrower and third parties to the lenders, the collateral manager and other persons as provided by the agreement.

The law charges the loan manager with maintenance of a register of members of the syndicate and records of all funds provided to the borrower. Typically, the borrower repays the loan by transferring funds to the loan manager, with the borrower's corresponding obligations terminating when the funds are so transferred or credited to the designated account. Thus, unless otherwise agreed by the parties to the agreement, members take on additional credit risks in relation to the loan manager's default on its obligations to further transfer funds on to the lenders. Considering this circumstance, Russian lawmakers limited the scope of entities which may act as loan managers. They include credit institutions, foreign banks, international financial institutions and VEB.

Change of loan manager and syndicate members

One of the most essential aspects of a syndication is the possibility for the members to assign their rights under the agreement (i.e., to take advantage of the liquidity of the loans). According to the Syndicated Loan Law, a syndicate member may assign its claims against the borrower to third parties without the consent of the other lenders under the agreement, including the loan manager. That said, the assigning lender must give notice of the assignment to the loan manager, who in turn must informs the borrower and make corresponding changes to the register of syndicate members.  Unless otherwise specified in the agreement, a right may be assigned to any person (not necessarily to a qualified syndicate member) once the loan has been issued to the borrower.

At the same time, a lender may only assign the duty to disburse the loan to an entity that is entitled to be a member of the lending syndicate. Here, the agreement can provide for the borrower's consent to a change of lender in such cases.

If a lender completely withdraws as a syndicate member, assigning its rights and obligations under the syndicated loan agreement to another entity, then all rights under the security transactions also pass to the new lender. At the same time, the assigning lender or the loan manager (whichever is provided by the syndicated loan agreement) is required to notify the collateral manager (if any) within a reasonable time about the assignment of rights to the collateral.

Collateral registration by the collateral manager

In addition to the basic provisions directly governing legal relationships related to the provision of syndicated loans, the Syndicated Loan Law also amends a number of current laws. In particular, the procedure for recording information about syndicated loan collateral in relevant public registers has been adjusted. Now, a collateral manager may register encumbrances in the names of and on behalf of the other lenders, simplifying the collateral registration process. At the same time, details about the collateral manager must be reflected in the respective registers depending on the type of collateral (the Unified State Register of Real Estate, the Unified State Register of Legal Entities, the register of notices of the pledge of movable property or the register of securities holders).

VEB and the project finance factory

The Syndicated Loan Law underscores VEB's key role as the state institution most responsible for development of Russia's syndicated finance market. First and foremost, this is driven by the development of a new mechanism to encourage investment activity –the so-called "project finance factory". This "factory" is a tool to support investment project finance in the Russian Federation using syndicated lending instruments, helping to increase related lending volumes. VEB is to serve as the operator of the project finance "factory".

To that end, in parallel with the passage of the Syndicated Loan Law, significant changes were made to the Law on the Bank for Development8 and various other laws and regulations. These changes enable VEB to act as a full-fledged member of a lending syndicate and to act as loan manager, syndicated loan arranger and collateral manager.

Current plans call for investment projects selected by VEB for participation in the "factory" to be funded in several tranches under a syndicated loan, one of which will receive funding from an SPV project company belonging to VEB. This is made possible by changes to the Securities Market Law,9 according to which such SPV project companies can (i) provide funding for long-term investment projects by granting loans and/or acquiring monetary claims under special-purpose loan (targeted credit) agreements, and (ii) issue bonds secured by pledges of monetary claims under those agreements.

Participation in project finance by a strategic investor like VEB (which has direct involvement by the state), along with the ability to securitize claims under a syndicated loan agreement, will help to boost the volumes and liquidity of the financial market, grow the amount of resources being directed toward the funding of projects with national significance and make syndicated loan "interests" highly tradable.

Standard documentation

Finally, it should be mentioned that participants in the syndicated lending market already have at their disposal the standard-form syndicated loan agreement developed by the Russian banking community. In 2015, the Association of Banks of Russia (Association "Rossiya")10 presented this standard agreement11 produced in accordance with best practices and the laws in force at that time.  The agreement was modeled on the standard-form documents of the London based Loan Market Association (LMA). For more than 20 years, the LMA has been developing and offering market participants standard-form syndicated loan agreements under the laws of various jurisdictions, which have worked well in practice. The use of standard documentation can help unify syndicated lenders' approaches to the handling of various issues and simplify negotiation of the terms and conditions of a syndicated loan agreement.

It can no doubt be expected that following enactment of the Syndicated Loan Law, the standard syndicated loan agreement produced by the Association "Russia" will soon be updated to reflect the latest regulatory developments.

Footnotes

1. Federal Law No. 486-FZ On syndicated loans and amending certain legislative acts of the Russian Federation" dated 31 December 2017 (the Syndicated Loan Law).

2. Chapter 9.1 of the Civil Code of the Russian Federation; Article 2(5) of the Syndicated Loan Law.

3. Article 2(2) of the Syndicated Loan Law.

4. The Far East and Baikal Region Development Fund (http://www.fondvostok.ru/), AO Far East Development Corporation (http://erdc.ru/) and the Far East Human Capital Development Agency (https://hcfe.ru/).

5. Federal state autonomous institution Russian Technological Development Fund (http://frprf.ru/).

6. Article 3(1) of the Syndicated Loan Law.

7. Article 356(2) of the Civil Code of the Russian Federation.

8. Federal Law No. 82-FZ "On the bank for development" dated May 17, 2007.

9. Federal Law No. 39-FZ "On the securities market" dated April 22, 1996.

10. Formerly known as Association of Regional Banks (Association "Rossiya").

11. http://www.asros.ru/ru/activities/syndicate/stnsnd.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Sep 2018, Conference, New York, United States

Dentons is delighted to support a global IT services and consulting firm Miratech as an event host partner at their annual conference called M-Force18 New York on September 27th. The event will be held at Dentons New York office in the heart of Midtown Manhattan, opposite Rockefeller Center.

2 Oct 2018, Seminar, Dallas, United States

We are pleased to offer a program of five sessions designed specifically for in-house counsel. Topics will include:

  • In-house corporate ethical issues
  • What recent Supreme Court decisions mean for business
  • Keeping lawyers out of your benefit plans
  • Litigation tactics for in-house counsel
  • Employment issues in the age of #MeToo
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions