On the February, 1st 2018 the Federal Law No. 486-FZ “On Syndicated Loan and Amendments to Certain Legislative Acts of the Russian Federation” dated 31.12.2017 (hereinafter — the “Law”) came into force. The Law regulates the order of lending funds to the borrower by several creditors (lending syndicate). The mechanism established by law is aimed to promote syndicated financing in Russia as well as to eliminate the existing gaps in Russian legislation which on multiple occasions have been highlighted by the regulating authority and bank community1.
Before the Law the Russian legislation had no specific rules on syndicated loans. Nevertheless, in the guidelines of the Russian Central Bank dedicated to the rules on assessment of credit risks the Central Bank was of the view that Russian banks are allowed to enter into the syndicated loan agreements2. Furthermore, in 2015 the Association of the Regional Banks of Russia has adopted a recommended standard syndicated loan documentation3 developed in a fashion similar to the standard documentation by Loan Market Association (LMA) which is meant to reflect the best practices of the loan market.
According to the Law, under the syndicated loan agreement a number of creditors undertake to provide the borrower with funds in the amount and within the periods stipulated by the agreement, whereas the borrower undertakes to return the funds and pay the interest and other payments stipulated by the agreement. The syndicated loan agreement is required to be executed in writing. Just as in case of non-syndicated loan agreements (Art. 829 of the Russian Civil Code), non-compliance with the written form requirement shall make the agreement null and void.
The list of persons which may act as a party to a syndicated loan agreement is limited by the Law. The borrower is required to be organized either as an individual entrepreneur or as a legal entity. As the creditor under the syndicated loan agreement may act only Russian or foreign banks, the company “Vnesheconombank”, international financial organizations and legal entities, which are entitled to extend credit loans under the law applicable to such entity. A syndicated loan agreement may provide for the figure of the loan arranger (or arrangers). The loan arranger (or arrangers) provides (for consideration) a number of services to the borrower in connection with preparation to execution of the syndicated loan agreement. The list of persons which may act as loan arranger is limited to the persons allowed to act as creditors under the syndicated loan agreement.
Besides the abovementioned parties, the syndicated loan agreement is required to have a lead manager. The lead manager is elected from the members of the lending syndicate. The lead manager is responsible for keeping a register, accounting and allocating among the creditors the funds payable by the borrower. For its services the lead manager receives consideration as well as reimbursement of expenses. When performing its functions, the lead manager acts on behalf of the lending syndicate. Unless otherwise provided by the Law, the rules on agency (Chapter 49 of the Russian Civil Code) are applicable to the obligations of the lead manager. The members of the lending syndicate are not allowed to exercise their rights under the syndicated loan agreement as long as such rights are exercised by the lead manager on behalf of the lending syndicate. Due to this rule the members of the leading syndicate are de facto deprived of the opportunity to unilaterally claim early performance of obligations in the event of default or other cases.
The relationships under the syndicated loan agreement can be illustrated as follows (see Scheme 1):
Many provisions of the Law are dedicated to govern the relationships inside the lending syndicate. Pursuant to the Law, under the syndicated loan agreement the borrower has a separate monetary obligation vis-à-vis every member of the lending syndicate. Nevertheless, the members of the lending syndicate can execute an intercreditor agreement whereby they undertake to exercise their rights vis-à-vis the borrower in coordination with one another. Unless otherwise provided by the Law, the general rules on decisions of the meetings (Chapter 9.1 of the Russian Civil Code) apply to decision-making within the lending syndicate.
Unless otherwise provided in the syndicated loan agreement, the borrower has to fulfill its obligations vis-à-vis each member of the lending syndicate by transferring the amounts due to the lead manager which shall then allocate such amounts incoming from the borrower among the creditors in proportion to their respective rights vis-à-vis the borrower. The borrower’s obligation to repay the loan is deemed to be fulfilled at the moment when the respective amounts of money enter the bank account of the lead manager.
Pursuant to the Law, the members of the lending syndicate are entitled to assign their rights vis-à-vis the borrower to third parties. To implement the assignment of rights it shall be enough to notify the lead manager of such assignment. The approval by the other members of the lending syndicate is not required. On the day the lead manager receives such notification it shall make the respective amendments into the register of the lending syndicate members.
Along with the development of the standard syndicated loan documentation by the Association of the Regional Banks of Russia, the adoption of the Law is a major step forward towards development of syndicated loans in Russian law. It seems that the eventual success (or failure) of the Law will be determined by the court practice which is yet to be formed as well as by the willingness (or a lack thereof) of the bank community to structure the syndicated loan agreements under Russian law in light of the adoption of the new legislation of syndicated loan agreements.
1Clause 6 section III of the Government Statement No. 1472п-П13, Bank of Russia No. 01-001/1280 dated 05.04.2011 “On the Bank Sector Development Strategy of the Russian Federation for the Period up to 2015”; “The Main Directions for Development of Financial Market of the Russian Federation for the period of 2016 — 2018&” (approved by the Board of Directors of the Bank of Russia on 26.05.2016)2For example: Instruction of the Bank of Russia No. 180-И dated 28.06.2017 “On Mandatory Bank Requirements”
3http://www.asros.ru/ru/activities/syndicate/stnsnd