Sanctions risk has become an increasingly central consideration in cross-border lending, particularly in developing and growth markets where geopolitical volatility, shifting regulatory regimes and diverse lender profiles are more common. While market focus has historically been directed at borrower and obligor sanctions exposure, recent years have highlighted a more complex and less anticipated risk: the consequences of a lender itself becoming subject to sanctions during the life of a syndicated loan transaction.
The Loan Market Association ("LMA") has now (February 2026) published guidance addressing approaches to dealing with sanctioned lenders in the context of syndicated loan transactions in developing markets. The guidance does not seek to prescribe drafting solutions, but instead provides a structured framework for analysing payment, documentation and risk-allocation issues where a lender becomes sanctioned mid-transaction. For practitioners operating in developing markets, including the GCC, Africa and parts of Asia, this guidance is particularly timely and practically relevant. The purpose of this article is to explore the LMA guidance and some of the issues raised by it.
Understanding the “sanctioned lender” issue
The guidance defines the core issue as the presence of a lender that becomes subject to sanctions, whether directly or indirectly, or is located in a jurisdiction that itself becomes comprehensively sanctioned. This may trigger prohibitions or restrictions on payments, participation in the loan, or the treatment of the loan as blocked property under applicable sanctions regimes.
Crucially, the LMA emphasises that sanctions issues affecting lenders are highly fact-specific and jurisdiction-dependent. The guidance is therefore intentionally limited in scope, focusing primarily on English law-governed transactions and the practical consequences of payment restrictions, rather than attempting to address every potential sanctions scenario. This reflects market reality as sanctions analysis in developing markets often involves overlapping UK, EU and US regimes, alongside local regulatory considerations.
Defaulting lender mechanics as a starting point
One of the central observations in the guidance is that existing LMA defaulting lender provisions, while originally designed to address insolvency or funding failures, may offer a useful starting point for addressing sanctioned lender scenarios. A lender that is prohibited from making or receiving payments as a result of sanctions may, in certain circumstances, fall within defaulting lender concepts, allowing for disenfranchisement, cancellation of commitments or forced transfers.
However, the guidance also recognises the limits of this approach. Sanctions may prevent the operation of standard remedies, including transfers or prepayments, meaning that defaulting lender provisions alone may be insufficient. As a result, parties are encouraged to consider whether sanctions-specific extensions or adaptations are required, rather than relying on defaulting lender mechanics by analogy.
Payment disruption and borrower protection
At the heart of the guidance is the treatment of payments involving sanctioned lenders. The LMA identifies payment risk as the most immediate and operationally significant issue arising when a lender becomes sanctioned. Without careful drafting, borrowers may face technical defaults simply because payments cannot legally be made to a sanctioned counterparty.
The guidance suggests that parties may wish to include express protections to ensure that no borrower default arises solely because a payment to a sanctioned lender is prohibited. At the same time, it makes clear that payment obligations should not be released entirely, but instead suspended or managed through alternative mechanisms pending the lifting of sanctions or receipt of relevant licences. This balance is particularly important in developing market transactions, where borrower credit risk and funding continuity can be more sensitive to disruption.
Practical payment mechanics in sanctioned lender scenarios
The guidance outlines several practical approaches that have been observed in the market for dealing with payments attributable to sanctioned lenders. These include withholding the relevant portion of payments, segregating funds in dedicated or blocked accounts, or routing payments through the agent subject to sanctions compliance analysis. Each option carries legal, operational and regulatory considerations, including licensing requirements, accounting treatment and ongoing administrative costs.
Importantly, the LMA cautions against granting unilateral discretion to any party to determine whether payments should be made, and stresses the need for objective, clearly articulated mechanisms. In developing markets, where banking infrastructure and regulatory oversight may vary significantly between jurisdictions, advance agreement on these mechanics can be critical to preserving transaction stability.
Wider documentary and agency considerations
Beyond payment mechanics, the guidance highlights a range of wider documentary issues that may arise during any period in which a lender is sanctioned. These include voting and consent rights, information dissemination, cost allocation and the interaction with transfer provisions. Where defaulting lender provisions do not apply, the guidance suggests that similar disenfranchisement or suspension mechanisms may be appropriate in sanctions-related circumstances.
The role of the agent is particularly sensitive. Agents must consider their own sanctions exposure when receiving, holding or distributing funds, and may require tailored protections or flexibility within the documentation. In transactions involving export credit agencies, additional complexity arises where cover is withdrawn in relation to a sanctioned lender, potentially triggering mandatory prepayment mechanics that may themselves be restricted by sanctions law.
Looking ahead
The LMA’s guidance reflects a broader shift in recognising that sanctions risk is no longer a peripheral concern but a key consideration in cross-border lending, especially in developing markets, and must be dealt with structurally in agreements. While the guidance stops short of recommending standardised drafting, it provides a clear analytical framework for identifying risk points and structuring pragmatic solutions.
For lenders, borrowers and agents active in emerging economies, the key takeaway is the importance of early, transaction-specific consideration of sanctioned lender scenarios. As sanctions regimes continue to evolve, parties that proactively address these risks in their documentation will be better positioned to preserve deal certainty, manage operational disruption and maintain access to international capital in an increasingly complex geopolitical environment.
