Provisions of the explanatory note to the Draft Law
The current version of the Law on Syndicated Loans provides for two forms of sub-participation widely used in global practice – funded sub-participation and risk participation (unfunded sub-participation). However, some provisions of the Law on Syndicated Loans are designed to apply funded sub-participation only, thus keeping some gaps in the regulation of risk participation.The developers of the Draft Law propose filling these existing gaps and making the Russian law risk participation more comfortable to creditors. In addition, the Draft Law (i) expressly allows assignment and transfer of of rights and obligations under a syndicated loan to an “external participant” (ie a lender under a participation agreement) and (ii) includes Russian special purpose companies into the category of eligible syndicate members.
The original version of the Draft Law was silent as to certain aspects which are now covered by the version adopted in the third reading.
Forms of sub-participation
The Draft Law supplements the definition of a participation agreement, indicating that a participant provides financing “within the timelines, in the cases and/or upon the occurrence of conditions.”This allows for the implementation of the risk participation structure, which contemplates making funds by an external participant available to the relevant lender of record, subject to the occurrence of conditions specified in the sub-participation agreement. These conditions include the occurrence of a payment default by the borrower under the underlying loan agreement.
Transfer of rights (claims) of a participant in a creditor syndicate
As a general rule, an external participant does not acquire the rights and obligations of the lender under the underlying loan. The opposite may be provided for by the participation agreement. The law on syndicated loans may also provide for derogations from the general rule.Currently, the Law on Syndicated Loans provides for the transfer of the rights of a syndicate member to a participant only in the event the syndicate member’s insolvency. The Draft Law adds further grounds for the transfer of the rights and obligations of a syndicate member to a participant, which are as follows:
- a decision is made to revoke the licence of a credit institution that is a syndicate member;
- any financial rehabilitation measure (preventing bankruptcy) is introduced in respect of a syndicate member; and
- a decision is made to liquidate a syndicate member.
Intercreditor agreement of external participants
If a syndicate member has funded its participation via several participants, the Draft Law expressly allows for an intercreditor agreement be entered into between such participants thus creating an option of subordination of the external participants’ claims. The intercreditor agreement, in this case, will cover the following matters, as is customary for such type of agreements:- the procedure for decision making by participants and the syndicate member;
- the procedure for funding the syndicate member; and
- the procedure for return of the funds provided, payment of interest, etc.
