The European Commission recently published a report it had commissioned to examine the market dynamics and potential antitrust risks related to loan syndication. The report serves as guidance to the financial industry by identifying aspects of the market and syndication process which may raise competition concerns.
It also makes recommendations to safeguard competition in the loan syndication market. Companies offering this service should dust-off their compliance policies as enforcement action may be on its way.
Syndicated loans are loans issued to a single borrower by several lenders in a single loan facility agreement to share credit risk. A major driver behind syndicate formation is lenders' desire for portfolio diversification as a means to risk management.
The Report was commissioned in view of indications that the market may not be functioning optimally from a competition law perspective. The Report, drawn up by Europe Economics and Euclid Law, observes that the segments of the industry that were examined are generally not highly concentrated and that borrowers tend to be sophisticated in how they structure their processes for obtaining capital. However, it also identifies some market features that could lead to anti-competitive conduct. As the level of competition risks varies depending on the stage of the syndication process, the Report includes a stage-by-stage analysis of competition issues relating to each element of the syndicated loan process:
- Competitive bidding for appointment as mandated lead arranger: the Report identifies market sounding prior to banking group formation as an important competition risk because it may facilitate collusion.
- Post-mandate to loan agreement: discussions between the lending banks to agree on the terms of the loan should not raise competition risks unless they go beyond what is necessary to jointly provide the loan to the borrower. Moreover, lenders may have multiple interactions with other lenders for different transactions. This could in theory lead to coordination on future transactions.
- Provision of ancillary services as a condition of the loan: ancillary services, which do not directly relate to the syndicated loan, raise the risk of a borrower achieving a sub-optimal economic outcome.
- Use of debt advisors also involved in syndicated loans: being a debt advisor and a lender for the same loan/borrower may not benefit the borrower.
- Coordination by lenders on the sale of the loan on the secondary market: the features of the secondary market should generally limit any attempt by sellers to manipulate the price of debt. Additionally borrower restrictions (which are common on secondary trading) may limit the development and efficiency of the secondary market.
- Promotion of unbundled price competition: in the event of a default there is the risk that banks act in a coordinated manner.
Although the Report does not draw any legal conclusions, it serves as guidance to the financial industry by identifying different aspects of the market and syndication process which may raise competition concerns. It also provides safeguards to ensure competitive outcomes in the loan syndication market. For instance, lenders should implement enforceable protocols on information sharing to avoid unwarranted information exchange. The Commission is now to decide on next steps, such as further analysis of the sector (e.g. through a sector inquiry) or formal investigations into behaviour potentially infringing the competition rules.
This article was published in the Competition Law Newsletter of May 2019. Other articles in this newsletter: