International lenders to Russian borrowers could face significant losses on existing loan facilities if sanction clauses in the loan documentation are triggered following the Kremlin’s invasion of Ukraine.
International lenders have issued US$24.825bn of syndicated and club loans to Russian entities that have yet to mature, according to LPC data. In addition, lenders have exposure to billions more in bilateral facilities, such as an extension of a US$225m ESG-linked revolving credit facility for metals and mining company Severstal, that was agreed last month with Citi.
The top five banks with exposure to Russian borrowers via syndicated and club loans are Societe Generale, ING and UniCredit, Intesa Sanpaolo and Credit Agricole, LPC data shows.
Repayment of these loans could come under threat if new sanctions imposed on Russia by the US, Europe and the UK trigger sanctions clauses in the loan documents – specifically the illegality mandatory prepayment’ clause, which was introduced after Russia’s annexation of the Crimea in 2014.
This would require borrowers to immediately prepay loans if lenders would otherwise be in breach of the new sanctions, and loan bankers are concerned that if companies refuse or are unable to do so, lenders could face steep write-offs.
“There are ongoing discussions over whether being in a facility or it becoming drawn down will lead to a breach of the illegality clause. Banks will be looking to cancel lines or sell down facilities if this is the case,” said one banker.
“It’s going to be case-by-case, but where they do ask for repayment quite often the borrower will be unwilling or unable to pay, so overall the portfolio will take a hit.”
The situation will accelerate if Russia imposes a blanket moratorium on foreign debt repayments as part of President Putin’s retaliation against the West.
“Will the borrowers repay? This is the biggest unknown, we have to wait and see if a moratorium is put on the repayment of all foreign debt,” said a second banker.
To claim or not?
Under the terms of the mandatory prepayment clause, banks have to claim their money back individually rather than as club or syndicate.
If the borrower becomes a specially designated national, which are individuals or entities that are directly sanctioned, then the banks can no longer have any exposure to these names and they are obliged to claim the mandatory prepayment.
If, however, an entity comes under a broader, sector-related sanction, where lenders are not allowed to provide new facilities but the borrower can still service existing ones, the situation is more complicated. Here, lenders have to decide on a case-by-case basis if they want to claim the money back or not.
“If the entity is directly sanctioned then we have no choice but to claim. If their assets are blocked and they have to stop servicing current facilities we have to discontinue the relationship,” said the second banker.
“But in some situations, if a borrower is impacted by a more general sectoral sanction, where they can no longer get new funding but can keep their existing loans, then we can choose whether we claim or not. I am in discussions internally at the moment between compliance and legal. We have to decide if it will be a problem to take a particular borrower with us into the future.”
Under the current round of sanctions, the US banks are expected to be the first to claim under the clauses.
“It is a broad generalisation, but I think the US banks will be the first ones to claim in the current reputational climate. For European lenders that have mainly banked these borrowers since 2014 there is more of a relationship angle to consider,” said a third banker.
Where a two-thirds majority of banks claim under the clause, then the whole facility automatically comes repayable.
Some lenders remain optimistic that well capitalised Russian borrowers will be willing to repay these facilities for the sake of future relationships, and in some cases lenders themselves have added clauses, such as the alternative currency clause, which allows banks to repay in roubles or even euros rather than dollars.
"The alternative currency clause might make it easier for them to repay. I also think a lot of Russian borrowers won’t want to break the relationship at this stage. The market is likely to come back and they want to still be able to access funds,” said the second banker.