Russia / Ukraine conflict – what are the implications for your corporate finance transactions?

Early on Thursday 24 February 2022, it was reported that Russian forces had commenced a military operation in Ukraine. Although foreshadowed, these developments mark a significant turning point in the conflict, with reverberations that will be felt in Europe and beyond.

So, how might this impact on your corporate finance transactions, and what should you be considering in the context of your existing financing arrangements? In this note, we consider sanctions, MAC/MAE clauses, force majeure, frustration, events of default and other implications arising as a consequence of the situation.

This briefing speaks to the position as at 28 February 2021.

Sanctions

Various sanctions were announced by the UK, EU, US and others initially, in connection with Russia’s recognition of the so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine. As the situation has escalated, further coordinated and broad ranging sanctions have been imposed against Russia and Belarus. Russia may well retaliate to these sanctions, through imposing countersanctions or blocking measures of its own.

Transactional impact and recommendations:

• Due diligence – Assess geographical connections of the business, members of the group, counterparties, directors and other connected parties. Lenders/banks may focus increasingly on the impact of this conflict on a company's business in their due diligence procedures. Prepare for this and factor it into timing of transactions.
• Perform a risk analysis - Could additional sanctions affect your ability or your counterparties’ ability to perform contractual obligations?
• Public disclosures - Review your public disclosure, including risk factors, and consider whether they need to be updated to comply with legal or regulatory obligations. When completing this exercise, look beyond the specific impact of sanctions and consider broader potential impacts of conflict such as increased risk of cyber offensives / cyberattacks.
• Representations and warranties - Lenders/banks may request changes to sanctions representations and warranties in contractual documentation, in order to reflect developments in international sanctions. Do any representations and warranties need to be adjusted, in light of due diligence and public disclosures?  New financing arrangements may include more detailed and nuanced sanctions provisions than prior arrangements.
• Third party sanctions confirmations - Sanctions confirmations wording may be updated by regulators, stock exchanges and the clearing systems, among others, to reflect the imposition of further international sanctions.
• Risk allocation – In a volatile market, parties will need to consider risk allocation between signing and closing, through force majeure clauses and MAC and MAE provisions (see further information about these below). This will be particularly relevant where settlement is taking place over a longer period.
• Use of proceeds – Ensure that proceeds will not be utilised for activities and purposes which are prohibited by sanctions; and assess the risk of potential blockages in the payment chain in advance, to ensure closing can proceed smoothly.

For more information about the sanctions position, please see the sanctions section of the Freshfields Risk and Compliance blog.

In addition to taking stock of the potential impact of the sanctions that have already been or are expected to be imposed, take a look at our guide on how to prepare for potential Russia sanctions.

MAC/MAE clauses

Material Adverse Change (MAC) / Material Adverse Effect (MAE) clauses permit parties to terminate, draw stop or accelerate agreements following a MAC/MAE. They normally require a high threshold to be reached before they can be invoked (they may be specifically drafted this way or, for more general provisions, tend to be interpreted this way).

Transactional impact and recommendations:

• A MAC provision regarding a company’s business and/or operations, on market standard terms, would typically only be triggered if a MAE on a company’s business is caused (usually taking the group as a whole, and often with other qualifications).
• Determining whether a MAC/MAE has occurred is highly subjective and, for relationship and reputational reasons, is often seen as a last resort. Lenders/banks have historically preferred to rely on other contractual provisions that may be triggered from a financial deterioration in a company's business, such as a financial covenant breach or a payment default.
• Directors may be required to confirm that no MAE has occurred, particularly in the context of a request to draw down on an RCF or capex facility. As a result of the current conflict, companies in certain jurisdictions and sectors will need to consider this carefully and monitor the impact on liquidity.

Force majeure

Force majeure clauses relieve a party from the consequences of a failure to comply with an obligation where that failure is due to the occurrence of an event outside of its control and may allow for termination of the contract without liability. Unlike the position for frustration (see below), a force majeure clause can cover existing or foreseeable events. These are not typically seen in loan documents but are standard in bond and modern ISDA documentation (i.e. the 2002 ISDA Master Agreement rather than the 1992 version).

Transactional impact and recommendations:

Bonds:

• A situation or event which is known at the time that a subscription agreement is entered into, but subsequently escalates, could potentially constitute a force majeure event giving the managers the right to terminate the subscription agreement between signing and closing.
• Under the ICMA standard form force majeure clause, such an event would need to constitute, in the opinion of the lead manager “a change in national or international financial, political or economic conditions or currency exchange rates or exchange controls” and be likely to materially prejudice success of the offering and distribution of the bonds or dealings in the bonds in the secondary market.
• Although unlikely to be exercised, issuers should consider the ramifications of the application of force majeure if planning to issue bonds.

Derivatives:

• The Force Majeure termination right in the 2002 ISDA Master Agreements can only be triggered after giving effect to any other applicable provision, disruption fallback or remedy provided for, and only applies if the party seeking to rely on the termination right could not, after using all reasonable efforts (but without any obligation to incur a material loss) overcome the relevant event.
• The Force Majeure termination event can only be triggered where a payment or delivery under a derivatives transaction is actually prevented pursuant to the occurrence of the relevant event, or would have been on the day the event is called. It is not dependant on the creditworthiness / solvency of the counterparties and the ability from a credit perspective of the counterparty to meet its obligations.

Frustration

A contract may be discharged on the grounds of frustration if something occurs after its formation, which is not due to the fault of either party, that makes it physically or commercially impossible to fulfil, or renders a party’s obligation radically different from that undertaken when the contract was entered into.

The doctrine is narrow, and it might not be available if the contract provides, expressly or impliedly, for the risk of supervening events that have occurred. Whether a party can invoke frustration as a result of the Russia / Ukraine conflict may turn on the length and intensity of the disruption.

Transactional impact and recommendations:

In a financing context, it is difficult to see circumstances in which financing agreements would be found to be frustrated, but this could be relevant for contracts in a company’s wider business.

Events of default

Whether events of default in financing agreements require consideration in light of the Russia / Ukraine conflict may turn on the drafting included, and the actual or potential impact of the conflict on each individual company within a group.

Transactional impact and recommendations:

• In terms of existing financing, review your events of default (in particular any illegality, suspension of business or expropriation events of default where relevant), to see if there is a risk of these being triggered.  In some financing contracts (e.g. the ISDA Master Agreement) relevant triggers of this sort may be expressed to be termination events or similar, rather than events of default. 
• Assess the impact of this on other financing arrangements - is there a risk of cross defaults or cross acceleration being triggered?
• Are there any hair triggers in local or ancillary financing that could run the risk of triggering cross defaults across group financing?

Broader impact and other considerations

In addition to the core themes and provisions discussed above, there are a number of other considerations worth keeping in mind:

• Refinancing and maturity profiles - If this crisis could potentially impact your current or imminent financing, it may be worth opening communication lines with counterparties early to pre-empt issues where possible and avoid costly delays.
• Consents and waivers - Assess required consent thresholds early for any waivers that might be required. Bear in mind that the time period for obtaining waivers could vary from bank to bank, depending on how fast they can convene credit committees and obtain internal signoff.
• Hedging - What termination trigger risks are there in your ISDAs which could be tripped by events in your group that could lead to a close-out of hedging or an inability to enter into new hedges? Would this trip provisions in other financing arrangements?

The uncertainty surrounding this escalation in tensions could also trigger widespread volatility in financial markets (fluctuations in equity and bond markets, rising oil and gas prices and/or restrictions in supply, fluctuations in commodity prices, rising inflation), which could impact market access and pricing in financing transactions. Parties will need to be nimble and responsive as and when periods of stability lead to the opening of a market window.

We will continue to monitor developments closely and provide further updates as appropriate. The position is evolving quickly and the impact on all companies and institutions will invariably be fact specific and bespoke. If you have any specific questions, do reach out to your usual Freshfields contact for more detailed advice.

Contributions received by Laura Clark-Jones, Senior Associate and Alice Dawson-Loynes, Senior Knowledge Lawyer.