On 5 April 2019, the European Commission (“EC”) published a report – prepared by Europe Economics at the request of DG COMP – on EU loan syndication and its impact on competition in credit markets (the “Report”).
The Report describes the functioning of the syndicated loan business and seeks to assess whether there are potential competition concerns with regard to syndicated loans in leveraged buy-outs (“LBOs”), project finance (“PF”) and infrastructure projects (“INFRA”). Syndicated loans are considered to be an important source of finance to the European economy. The EC’s interest in this business is therefore primarily motivated by an assessment of its effectiveness and functioning besides potential competition concerns. Geographically, the Report focuses on France, Germany, the Netherlands, Poland, Spain, and the UK. These countries account for approx. 75% of syndicated lending volume in the identified segments in the EU, with Poland making up the smallest share of the group.
The Report highlights some competition risk areas in syndicated lending markets but also outlines certain “critical safeguards” that should be maintained to offset this risk. It identifies the following areas where some competition risk could be identified:
Pre-bid market soundings: The Report cautions that market soundings by Mandated Lead Arrangers (“MLA”), which screen the interest of other banks to participate in syndication, may facilitate collusion. It highlights that market soundings may lead to exchanges of sensitive pricing information and thereby increase the risk of collusion. This risk is amplified where banks do not separate their syndication and origination desks.
Post-mandate to loan agreement: Post-mandate, the risk of exchanges of commercially sensitive information decreases where loan terms are typically negotiated bilaterally between individual lenders and borrowers. However, the Report indicates that, where lenders repeatedly interact over a longer time period, the resulting transparency may increase the risk of collusion.
Ancillary services: Ancillary services are typically decided and allocated as part of the initial loan agreement. However, the Report identifies some cases where MLA tie the provision of a loan to the subsequent provision of ancillary services, thereby restricting the provision of ancillary services to the syndicate. The Report takes the view that this could result in sub-optimal outcomes for the borrower with the risk being slightly elevated in the PF and INFRA segments and in smaller regions, such as Poland, which offer less choice.
Debt advisors involved in the syndicated loan: The Report identifies certain instances where lending and advisory roles are bundled and indicates that this may result in sub-optimal outcomes, since the advisor is not appointed following a competitive process. The Report also finds a further risk that the lender in its advisory capacity could influence the borrower to act in a manner that primarily benefits the lender rather than the borrower.
Coordination on the secondary market: The Report states that may be a competitive risk where the syndicated banks coordinate on the timing and terms of debt sales in the secondary market. The Report finds that such forms of coordination would amount to by object infringements. However, it also acknowledges that the characteristics of the secondary market, such as the high degree of buyer sophistication, render collusion less likely.
Refinancing: The Report identifies a risk that discussions amongst syndicate members regarding restructuring following a default may facilitate collusion. Usually restructuring and loan origination desks function separately and an outside lender participates in refinancing discussions, thus mitigating the scope for collusion. However, the Report finds that, absent either or both of these mitigating factors, the risk that borrowers receive less competitive terms increases, such as, for example, when there is time pressure due to the borrower’s default.
The Report does not identify specific anti-competitive practices nor does it set out concrete enforcement recommendations. Rather, it highlights certain risk factors within the loan syndication business and areas that merit further analysis that may inform the EC’s policy. This may indicate heightened regulatory interest in the syndicated loan business in the short-term.
The Report takes with one hand, but gives with the other. It identifies certain market features that could facilitate collusion, but it then sets out certain “critical safeguards” that can mitigate the competitive risks outlined above. First, banks can place an emphasis on their duty of care to clients, including the prevention and management of conflicts of interest and the impartial provision of advice to clients. Second, banks can have transparent and enforceable measures in place to prevent the exchange of information, especially between syndication and origination desks. Third, banks can limit the tying of ancillary services to syndicated loans.
In any case, the Report does not suggest any concrete enforcement actions and does not expressly call for comments. As such, it is still an open question which antitrust enforcement action, if any, the EC will take as regards to syndicated loans.