The new Law on Syndicated Loans has been discussed during the 9th St Petersburg International Legal Forum. The panel was held in a battle-like format, with two teams discussing if the lenders’ rights should be enforced jointly or separately, should the borrower default on a loan.
The session “Syndicated Loans in Russia: One for All and All for One?” was chaired by Elena Borisenko, Deputy Chairman of the Board of Management at Gazprombank JSC.
“The issue of syndicated loans might seem to be highly specialized but affects everyone. The long-awaited Law on Syndicated Loans has been recently enacted in Russia and has immediately become a target of criticism, since every serious legislative undertaking is often a result of numerous trade-offs. I would like to dwell on several important aspects of this law which we believe to be the most controversial,” Ms. Borisenko said, kicking off the discussion.
The Linklaters CIS team opted for the “syndicate democracy” to jointly solve problems when the borrower defaults. “One of the main reasons why banks form syndicates is that a single bank is neither able to provide the necessary financing in whole nor take on the corresponding risks, while the borrower is more comfortable speaking with a group of lenders and work out a single approach to loan conditions. The borrower also needs to be protected from inappropriate actions of a lender if these actions conflict with his or her interests. Why do lenders need a syndicated load in the first place? Because they want to spread project risks and receive more collateral. In return for this, lenders are willing to waive a share of their rights by transferring them to the loan arranger, acting in the interests of all lenders,” said Julia Voskoboinikova, Legal Counsel at Linklaters CIS.
“Of course, their takes on the project implementation can differ, as can their relations with the borrower and so on. Their interests should be balanced based on the syndicate democracy principle where decisions are made by majority vote, most frequently by qualified majority of votes determined according to the share of funds the lenders provided,” she added.
Rustem Miftakhutdinov, Head of Insolvency Proceedings Unit at Rosneft Oil Company PJSC, however, noted that there is a serious drawback to this approach, namely that the majority can make mistakes. This way, even if a lender knows the correct solution, for instance if they know that the borrower’s company can be saved, they inevitably lose the vote to other syndicate members who opted for bankruptcy.
“The most difficult question in a syndicate is: What is to be done if the majority misjudges the situation? Let’s say the majority is steering towards a cliff while a single minority stakeholder knows there is a cliff and it is the wrong way to go. How do we solve this situation? The discussion participants quite rightly noted that this makes debt restructuring unavoidable. This quasi-corporate litigation should be decided in a bankruptcy court between the syndicate members. In fact, we need to assess if there are any prerequisites to restructuring at all, and the court may ultimately decide that bankruptcy is necessary as part of the restructuring process and the minority is right, or vice versa,” Mr. Miftakhutdinov explained.
The Ivanyan & Partners team had a different approach to this problem: they think that any syndicate member is entitled to call in loans individually in case the borrower defaults, without paying attention to the majority opinion.
“Calling in the loans is individual by its nature, as is the obligation to provide a part of the syndicated loan in proportion to the share of participation. This means that the relation between the lender and the borrower is individual. The only thing which is shared by all the lenders in a syndicated loan is the financing conditions and the position of the loan arranger, acting as the point of contact for the borrower. However, the lender’s claims remain individual and they are entitled to call in their loans. It's quite obvious that an enforcement of these claims will be possible only after the lenders’ syndicate considers the loan defaulted,” Dmitry Kuzmin, Senior Associate of Ivanyan & Partners said.
Roman Fomin, Senior Managing Director at VEB.RF, thinks that the lenders and borrowers should come to common terms on how they will proceed in case of an emergency situation right from the get go. “If there is a serious misalignment and opinions are completely different, the best decision would be to put the question on hold. In this scenario, the law permits to provide for an action plan in a contract clause: The parties should agree beforehand, how they would proceed in case of a war, that is, when the borrower defaults. This is a frequently used option. If they did not come to common terms beforehand, however, it would be hard for them to agree on joint or individual actions, in my opinion– and even more complicated, given the fact that the syndication market is quite small, in huge demand and there’s no extensive legal practice available,” Mr. Fomin noted.
Ivan Dun, Vice President – Department Head at Gazprombank JSC, spoke out for acting on this matter quickly. “The tool itself determines how key decisions should be made. The base principle of a syndicated loan is having syndicate members act together. Today, we have heard numerous times that both the market and the average loan amount are small, but this is where the problem is. To tackle this, we need to have a full-fledged law enacted, not an abridged one which only partly reflects global best practices. This needs to be done for the market to develop, to awaken it from its semi-frozen state, to prevent Russian market players from entering into agreements governed by foreign law, which they now do out of necessity, because the Russian law imposes lots of restrictions. In my opinion, the main problems with the split decision-making process arise when the borrower defaults on the loan. A default is a critical moment when the existence of a business is at stake, and very often these are huge or even strategically important businesses,” Mr. Dun summarized.
After the discussion, the referee of the battle, Rustem Miftakhutdinov, announced his verdict: “The Linklaters CIS team wins the battle, while the procedural victory goes to Ivanyan & Partners”.