Conflict in the Middle East: Key Considerations for Banking Transactions

The ongoing conflict in the Middle East presents immediate and material risks for banking transactions with regional exposure. For bankers leading cross-border financings, trade finance and acquisition facilities, we recommend focusing attention on three critical areas: market and systems disruption, document execution requirements and the potential invocation of material adverse change (MAC) clauses. 

Market Volatility and Operational Disruption

Armed conflict of this nature typically triggers significant volatility across financial markets.  Already being witnessed are sudden movements in oil prices, currency fluctuations and widening credit spreads – all of which may affect pricing assumptions embedded in financing agreements. Liquidity in certain markets may tighten rapidly, particularly where counterparties have exposure to affected jurisdictions.

Operational disruption is an equally pressing concern. Payment systems, correspondent banking networks and clearing infrastructure may face interruptions due to new or expanded sanctions, cyberattacks or physical damage to regional infrastructure. Banks will need to assess whether settlement systems can remain functional under various scenarios and how that will impact their obligations to lend, whether counterparties can access international payment networks and whether applicable sanctions regimes could restrict transactions involving certain entities or jurisdictions. Contingency planning for delayed settlements or temporary system outages is essential.

Document Execution Challenges

The conflict may impede the physical movement of documents, which is particularly relevant for transactions requiring original signed documents, including facility agreements, guarantees, security documents and negotiable instruments used in trade finance. Bankers should review transaction documentation to determine whether electronic signatures are permitted and whether counterparts will accept digital execution under the relevant governing law.

Where original documents are required for enforceability or perfection of security interests, logistical challenges such as courier disruptions, border closures or postal service interruptions may delay completion. In such circumstances, parties may consider temporary waivers, reliance on scanned copies pending delivery of originals, or engagement of local counsel to facilitate execution within accessible jurisdictions.

Material Adverse Change clauses

A key question arising in periods of conflict is whether the outbreak or escalation of hostilities constitutes a material adverse change under existing financing agreements. MAC clauses typically allow lenders to refuse funding or accelerate obligations if a significant negative change affects the borrower’s financial condition, business, or prospects.

However, invoking a MAC clause is generally difficult. Courts and market practice tend to interpret these clauses narrowly, often requiring a substantial, long-term deterioration rather than short-term market turbulence. The critical issues will include the borrower’s geographic exposure to the conflict, disruption to supply chains and the degree to which hostilities materially affect the borrower’s ability to perform its obligations.

Practical Recommendations

The implications of this conflict extend beyond macroeconomic concerns. Transaction execution logistics, operational resilience and contractual rights all require attention. We recommend proactive review of documentation, systems dependencies and counterparty risk exposure to ensure that transactions can proceed – or be appropriately paused – within the bounds of both operational reality and contractual protections.

How Can We Help?

Our team is available to assist clients in reviewing existing transaction documentation and developing appropriate risk mitigation strategies in light of the evolving situation.

For more information on the above alert, feel free to contact the key contacts.