Anti-trust enforcement—assessing the loan syndication market

Anti-trust enforcement—assessing the loan syndication market

Francesco Liberatore, partner at Squire Patton Boggs, examines the European Commission’s final report, ‘EU loan syndication and its impact on competition in credit markets’, which evaluates the loan syndication market and whether lenders in certain Member States are able to violate anti-trust rules when collaborating in loan syndication work.

Original news

On 5 April 2019, the European Commission published its final report on EU loan syndication and its impact on competition in credit markets, focussing on specific segments of the syndicated loan market, namely those connected with leveraged buy-outs (LBOs), project finance and infrastructure finance. The aim of this market study was to assess the loan syndication market in terms of its effectiveness and functioning, and to identify potential competition concerns. The study concentrates on those Member States that are the most significant in terms of the location of borrowers, lenders and investors, which are France, Germany, the Netherlands, Poland, Spain and the UK.

What is the background to the report?

The European Commission’s interest in syndicated lending is not new. In its 2017 management plan, the European Commission had indicated that it would engage in a study on potential competition issues relating to loan syndication. At the time, the European Commission described this as an area that:

‘Exhibits close co-operation between market participants in opaque or in transparent settings, such as over-the-counter activities, which are particularly vulnerable to anti-competitive conduct.’

The European Commission is not alone in expressing an interest in the sector. The Spanish Competition Authority and the UK’s Financial Conduct Authority (FCA) have both investigated instances of alleged collusion in the manipulation of price for syndicated lending, although the UK probe was resolved by way of commitments, while the Spanish case resulted in an infringement decision.

Against this background, after nearly two years, the study (prepared by Europe Economics and Euclid for the European Commission) is the first comprehensive assessment of this segment of the capital markets and aims to identify whether lenders may violate anti-trust rules when working together in loan syndication scenarios. It focuses on six Member States (France, Germany, the Netherlands, Poland, Spain and the UK). The analysis examines three specific segments of the syndicated loan market:

  • LBOs
  • project finance (PF)
  • infrastructure

While the European Commission explicitly notes that it has not taken a position on what is falling within or outside the scope of anti-trust rules regarding syndicated lending, the 324-page study has the potential of making syndicated lending the next frontier of anti-trust enforcement within the financial services sector, after foreign exchange.

What issues or areas of concern have been identified?

According to the study, the sector displays certain market dynamics that could give rise to a competition law risk, including information sharing, cooperation, vertical market power and misaligned incentives that may give rise to sub-optimal loan terms or sub-optimal market outcomes. The study also points out that lenders have bargaining power when borrowers are in financial difficulties. Based on these market dynamics, the study identifies the following key issues by reference to the stage of the process of syndicated lending and by market segment:

  • pre-bid market soundings—the study finds that, in competitive bidding processes for appointing individual banks to a lead banking group, there is a risk of inappropriate information sharing between actual or potential competitors. The study finds that market soundings or inter-bank information exchanges concerning pricing information may influence an individual bank’s response to a borrower’s request for proposal (RFP) and therefore impact the competitive outcome of the bidding process. Regarding the pre-bid stage, the study highlights the PF/infrastructure segments as areas of greater potential concern, due to comparatively low availability of information to assist a bank in forming its view on a project. By contrast, in the LBO market, this risk is considered to be relatively lower
  • post-mandate interactions—the study also concludes that there is a general risk that lenders can observe each other’s behaviour and strategies at the post-mandate stage—eg coordination of future loans, refinancing in conditions of default. However, it considers this a relatively lower risk area, which should be assessed on a case by case basis
  • provision of ancillary services—the study identifies as a competition law risk that Mandated Lead Arrangers award connected services (eg hedging) or future services (eg mergers and acquisitions (M&A) advisory services) conditional upon the provision of the loan. According to the findings, discussions among banks aimed at sharing these services between them, coordination on pricing and uncompetitive bundling of services with the initial loan terms, could give rise to anti-trust risk. The study finds that this may lead to restrictions of borrowers’ choice, and concludes that further monitoring may be warranted
  • other potential risk areas include:
    • the use of debt advisers which are also involved in syndicated loans (particularly common in the PF/infrastructure segment)
    • coordination by lenders of the loan on the secondary market (ie post closure loan trading)
    • refinancing in loan default situations

What might the next steps be at the EU and local level? How might Brexit affect this?

At this stage, the European Commission and national competition authorities will likely use the study to inform their understanding of the sector and assess whether and where to intervene. The European Commission could also decide to launch a sector inquiry, if it thinks that a market is not working as it should and believes that competition law breaches might be a contributory factor. At the same time, the national competition agencies could also launch individual investigations if they suspect any specific conduct in their respective jurisdictions.

Brexit would be unlikely to affect an EU sector inquiry or an EU-wide investigation assuming a Brexit extension until the end of October 2019. Furthermore, sector inquiries often result in individual investigations from an early stage of the inquiry (eg pharmaceuticals, telecommunications, energy) either at EU or national level. However, because of Brexit, any individual investigation in the UK could well be deferred by the European Commission to the UK’s FCA or Competition and Markets Authority within the European Competition Network. If the European Commission does decide to launch an inquiry, banks and other parties can expect information requests that will be lengthy, and the European Commission can carry out inspections based on those requests.

What are the compliance recommendations going forward?

The study notes a number of safeguards that can mitigate the competition law risk in practice. With regard to market sounding and the exchange of (pricing) information, the study suggests establishing protocols that limit exchange to deal-specific information, setting out how this kind of information may be transferred, and to avoid alignment of prices. The regular use (and enforcement) of non-disclosure agreements (NDAs) is also referred to several times throughout the study as a risk mitigation strategy.

As to the risk of the syndicate tying ancillary services to the main loan, the study finds that it is advisable for syndicates to carefully manage and limit the cross-sale of services in order to avoid the risk of impairing competitive conditions in neighbouring markets. The study recommends keeping ancillary services separate if they are not directly linked to the loan itself.

Generally, the study recommends the adoption of compliance measures, especially competition law training for relevant staff highlighting the risks of co-operation and the establishment of policies regarding critical communications.

Against this background, banks and lenders should make sure to have in place appropriate anti-trust compliance safeguards, such as regular training for staff, template protocols for syndication processes and NDAs.

Interviewed by Devon Marshall.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.






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About the author:

Neil specialises in banking and asset finance transactions with a particular emphasis on shipping finance, aviation finance, renewable energy finance and in providing corporate finance transactional support. Neil qualified as a solicitor with TLT in 2004 and worked as a finance solicitor in both the Bristol and London offices before joining the asset finance team at DLA Piper.