Competition and finance lawyers aren’t natural bedfellows, but things may be about to change following the European Commission’s recent publication on “EU loan syndication and its impact on competition in the credit markets” (the “Report”).
The Report was prepared for the European Commission by Europe Economics and Euclid Law. It assesses the effectiveness of the syndicated loan market and suggests certain safeguards that banks should follow to ensure competition is upheld through the loan syndication process.
The Report’s key findings
The Report focuses on three areas of the syndicated loan market - leveraged buy-outs, project finance and infrastructure finance - across six EU member states (including France, Germany and the United Kingdom (UK), which were selected because they represent the most significant so far as the European loan syndication market is concerned in terms of the location of borrowers, lenders and investors).
Whilst the Report stops short of identifying any specific competition law infringements or significant issues requiring investigation by the competition regulators, it does flag up a number of risk areas which might give rise to competition issues.
The Report highlights that competition issues can arise during the following stages of the syndication process:
- Competitive bidding processes before a lending syndicate is formed: the risk here is the exchange of market sensitive information between market participants prior to the formation of lending syndicates. This risk is likely lower where any information sharing is limited to generic (as opposed to specific) market soundings or is done in accordance with NDAs or with explicit borrower/sponsor consent.
- Post-mandate to loan agreement: there is a risk (albeit likely low) of lenders discussing loan terms amongst themselves to the detriment of a borrower. Such risks can be managed by the borrower agreeing the key loan terms with each lender on a bilateral basis before bringing lenders together at post-mandate stage or limiting the scope of post-mandate discussions (e.g., so that there are limited discussions at such stage around pricing and hold strategies).
- Provision of ancillary services: where lenders make it a condition to a loan that the borrower obtains ancillary financial products (such as interest rate swaps or other hedging arrangements) from specified syndicate members only, there is a risk that the borrower/sponsor is susceptible to getting a worse deal. Many of you will be familiar with the controversy surrounding banks such as RBS which have previously got into hot water with the UK financial services regulator after requiring many small business customers to take out interest rate swap products with the bank as a condition to making loans available to them (many of those swaps often ended up out of the money with the borrowers only understanding the risks they were entertaining after the event). Whilst in the UK the Financial Conduct Authority has recently announced a ban on firms entering into agreements with a provision that gives them a right to provide future primary market services to their clients (to see our previous commentary on this development, please click here), there is no uniform approach across other EU member states when it comes to regulating such arrangements. The Report refrains from calling for an outright ban on arrangements which confer a “right of first refusal” or “right to match” in respect of ancillary financial services, but notes that their use may result in sub-optimal outcomes for borrowers.
- Use of debt advisors: there is a conflict of interest risk where a lender acts as syndicate bank as well as debt advisor to the borrower. This risk can be mitigated by appropriate Chinese walls between the team advising the borrower and the lending team.
- Refinancing where the borrower is in default: there is potential for syndicate members to take advantage of a troubled borrower by discussing restructuring or refinancing terms amongst other syndicate members. This risk can be mitigated by separating the lenders’ restructuring teams from their loan origination teams. The syndicate also needs to be careful if it seeks to tie ancillary services to the restructuring on non-competitive terms.
The Report also considers the risk of competition infringements in the secondary loan markets but considers the risk to be relatively low.
Comment
The Report does not represent the recommendations or conclusions of the European Commission itself. That said, its publication is expected to inform the Commission’s policy and enforcement in this area going forwards.
Overall, the risk of anti-competitive behaviour in the syndicated loan markets is expected to be low because, generally-speaking, this is a market dominated by highly sophisticated borrowers and sponsors, often represented by specialist advisors and who typically run very competitive processes to select lenders and determine loan terms.
That said, lenders should not be complacent and the publication of the Report does serve as a useful reminder that this is a market that is not immune to scrutiny by the competition authorities. For lenders participating in the syndicated loan markets, the competition risks discussed in the Report can be mitigated by, for example, ensuring employees receive adequate training and setting up appropriate information barriers between different teams. Funders should also be careful about the terms on which they offer ancillary financial services to borrowers.
With our new Prime Minister ramping up preparations for a No Deal Brexit, despite describing its occurrence as a million to one chance, domestically focused banks may be tempted to downplay the importance of the Report. But even if the UK does cease to be part of the EU it is likely that most participants in the European syndicated loan market, especially those operating both in the UK as well as in other EU states, are likely to be mindful of its contents and will seek to comply with the spirit of the Report.
For a full copy of the Report, please click here.
Matthew Padian