Although there is no market consensus on sanctions in credit agreements, there are many similarities between the sanction formulas required by lenders. Penalty formulas are usually included in the following sections (AMAs) of the loan agreement: definitions, insurance, general covenants, information covenants and default. When negotiating sanction formulations, it may be necessary to negotiate the following: applicable sanctions, level of compliance, sanction, sanction investigation, use of credits, use of bank accounts, compliance procedures, significance and consequences of the breach of sanction obligations. The following paragraphs deal with each of these issues. Unfortunately, it tends to be difficult to negotiate sanctions formulas. Lenders often argue that the proposed wording is a standard formulation for the bank(s) and that it is not possible to make deviations. Although this argument is used, a negotiation is still possible. it is important to bear in mind that there is no market consensus on sanctions requirements; each bank has its own sanctions policy and its preferred wording in credit agreements. The Bank`s standard sanction formula, which serves as a documentary agent, is often used as a starting point for formulating sanctions. Other lenders in the syndicated or clubbed transaction may later add additional requirements to comply with their internal procedures. Sanction clauses may therefore have double requirements and be rather restrictive for the borrower. However, if the proposed wording compromises business opportunities or is too burdensome for the borrower, companies with limited bargaining power can also negotiate sanction clauses in order to become more practicable. The Credit Market Organization («LMA») has not published any recommended sanction provisions in its forms of facility agreements.
In 2014, the AML recommended in its guidelines to include assurance that the borrower is not subject to sanctions and an obligation to give lenders the comfort of not using the proceeds of the loan in a manner that violates existing sanctions. The AML states that the exact wording of such representation and obligation depends on the transaction, the parties involved and the sanctions regimes that the parties wish to undertake. Unfortunately, many lenders today incorporate much broader penalty clauses into all credit agreements, regardless of the borrower`s situation. This note explains some general financial covenants used in commercial financial transactions, including:•Minimum Net Asset Test•Leverage Ratio•Leverage ratio •Or debt to Equity Ratio•Compensation Ratio (or Acid Test Ratio)•Cash flow Interest hedging ratio and•Liquidity ratio is stated: Compliance with sanctions law is an important issue in credit documentation. Given the strengthening of sanctions legislation, increased implementation, and the huge potential for fines, lenders are increasingly insisting on strong clauses to ensure borrowers comply with sanctions laws. While a few years ago, sanctions were not on the agenda at all, lenders are now including sanction-related representations, covenants and information in credit agreements. Many lenders fear reputational risk when a customer violates sanctions and lenders tend to design sanctions clauses that are more restrictive and extensive than the sanction laws applicable to the borrower or even the lender itself. Such broad penalty clauses can impede the borrower in due form and significantly increase the risk of default of the credit agreement. The description of sanctions laws and their specific effects on enterprises do not fall within the scope of this article; only the sanction formulas in credit agreements that a borrower may face are mentioned. .