Divestment from sanctioned debt is by no means a straightforward task. Where, prior to sanctions, a particular economic relationship may have been considered good business sense, the same relationships transform overnight into significant financial, legal, reputational and operational liabilities. This is a scenario that a number of ship and aircraft owners are facing following the listing of Russia’s state transport leasing company GTLK on the international sanctions list.
We know that the European arm of GTLK (now in liquidation in Ireland) alone financed over 19 vessels and 70 narrow-body aircraft - the status of many of these assets has yet to be resolved. As we have seen in our work supporting the Havila Group in a 15-month legal battle to successfully refinance four state-of-the-art LNG/battery powered cruise ships, this is a rapidly evolving landscape that requires close attention to detail.
We know that GTLK is far from the only entity currently facing economic sanctions, or a connection to a company under economic sanction such that businesses now need to consider how to extricate themselves from existing contracts and recover clear titles to their assets. While we have been successful in setting a legal precedent that paves the way for businesses seeking to divest themselves of sanctioned debt, we believe that there are a number of safeguards against risks posed by sanctions that could be inserted into future contracts.
Advancing new terrain
For an industry seeking significant financial investment to help rapidly scale market solutions for decarbonisation, sanctioned debt poses a complex and unpredictable risk. More often than not, financing contracts are drafted to benefit the lender, leaving very few options for the borrower. Since this funding is used to bankroll large assets such as vessels or aircraft, companies must establish a legal route for repayments as per their contracts without breaching sanctions. Businesses simply cannot afford to have critical assets, such as vessels, laid up for long periods of time or have their insurance called into question.
Thus, a key goal for any party is to ensure continued operation of commercial interests with as little disruption as possible, while remaining within the law in respect of sanctions. This may take the form of refinancing an asset or seeking to accelerate a purchase option in order to divest from sanctioned debt. Acting on behalf of the Havila Group, we have already established a legal route under English Law to go about this process.
It is reasonable to be concerned about securing refinancing given that investors are likely to be wary of companies associated with sanctioned entities, regardless of whether they did so prior to sanctions and acting in good faith. This is simply good business sense on their part — no financing house, bank or PE fund will commit funds without knowing that payment under the contracts (to a sanctioned entity) is entirely legal. A common issue is that sanctioning bodies often require the source of funds or visibility to the entirety of the flow of capital before licensing a transaction. This creates a chicken and egg scenario where financiers are unlikely to commit before knowing the payment is legal, while licences are harder to obtain until funds are committed and examined.
However, with a new legal route now in place, asset owners and potential investors can both rest easy. Assets, such as vessels, can now be refinanced straightforwardly at attractive rates to both parties, and the funds will be paid into frozen accounts, so as not to be passed to sanctioned entities so long as the global regime is in place. This ensures that any transactions taking place while divesting from sanctioned debt remain compliant and visibly above board.
It is our experience that professional advisors can assist here, by speaking directly to potential investors and their representatives in order to explain how obtained licenses operate to legalise payments which might otherwise fall foul of the regime. Most recently, Wikborg Rein was able to gain approval from no fewer than six national competent sanctioning bodies to license a debt divestment. This simply reflects the international nature of the industry, but also the value in choosing the correct advisors to navigate a path through.
Evolving our approach
Despite the creation of this legal route, refinancing may still prove complicated. Perceived reputational damage can limit the willingness of investors, banks and financing houses to commit funds, thereby making the process of divesting from sanctioned debt even more difficult. It can limit partnerships and collaborations, impact business operations (including recruitment and retention), and create market uncertainty.
In effect, companies may find themselves facing a Gordian knot where the only safe route to new funding for projects linked to sanctioned funds is to have never been funded by a sanctioned entity in the first place. And while larger companies may be able to stay afloat while seeking viable solutions, smaller businesses are more likely to fold — impacting our industry and global supply chains.
This relatively underexplored risk for the maritime industry poses a real threat at a time of greater geopolitical risk. Where existing contracts may safeguard against a variety of potential liabilities and penalties, few, if any, consider the ramifications of sanctions on the financier for ship owners and operators, or offer a route through for both sides — despite recent events clearly demonstrating the value of this prudent manoeuvre to future proof operations.
Looking at the whole picture
Where huge liabilities are involved, business risk is compounded by the difficulty in finding an investor with sufficiently deep pockets, situational awareness and risk appetite to step into the breach. It is vital that owners, operators, lawyers, and insurers collaborate to ensure commercial decisions are informed by expert advice. The importance of assessing and conveying the level of sanctions exposure associated with a specific deal is evident, as is the benefit of achieving consensus on how best to manage the attendant risks, should they manifest themselves.
Sanctions clauses are commonplace for shippers and cargo interests, however clauses rarely envisage the financing party falling foul of the sanctions list. To pre-empt similar cases, standard shipping contracts would ideally include new clauses that stipulate the rights and obligations of all parties (including any financier) in the event that one or more appear on a sanctions list. While the addition of yet more clauses to any contract may be greeted by groans, identifying such risks early and agreeing equitable mechanisms to manage them, would surely pay dividends should such an event arise.
Although it is notoriously difficult to predict how sanctions regimes may be applied in the future, current circumstances have afforded us an opportunity to gain valuable learning points for industry stakeholders. These hard-won contractual lessons must be implemented to enhance sectoral resilience so that we can navigate any future crisis and keep businesses - and their valuable assets - afloat.
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