Banking and Finance News

Loan syndication: European Commission publishes report on impact on competition

The European Commission has re­cent­ly pub­lished a re­port on the loan syn­di­ca­tion mar­ket and its im­pact on com­pe­ti­tion in cred­it mar­kets. The re­port iden­ti­fies a num­ber of com­pe­ti­tion law is­sues which may lead to in­creased scruti­ny of the European syn­di­ca­tion mar­kets by European com­pe­ti­tion au­thor­i­ties.

In 2017, the European Commission com­mis­sioned a study to analyse the loan syn­di­ca­tion mar­ket, in view of its im­por­tance as a “ma­jor con­trib­u­tor of debt fi­nance, par­tic­u­lar­ly in terms of large-scale debt”, and to iden­ti­fy com­pe­ti­tion law is­sues which might arise from it. On 5 April 2019 the fi­nal re­port (“the Report”) was made pub­lic, and it iden­ti­fies a num­ber of com­pe­ti­tion law con­cerns. (1)

The main con­cern iden­ti­fied is the flow of com­mer­cial­ly sen­si­tive in­for­ma­tion be­tween lenders.

The Report finds that dur­ing the pe­ri­od un­til the for­ma­tion of the lender group, i.e. when fi­nal terms are agreed and the orig­i­nal lenders are man­dat­ed, such in­for­ma­tion flow may oc­cur through mar­ket sound­ings by the lend­ing in­sti­tu­tions re­gard­ing a trans­ac­tion. Depending on the lev­el of de­tail of such con­tacts, they may en­tail the shar­ing of pric­ing in­for­ma­tion spe­cif­ic to a trans­ac­tion and thus re­duce com­pet­i­tive pres­sure by shar­ing of fu­ture com­pet­i­tive in­tent, there­by af­fect­ing lenders’ con­duct in re­spect of that trans­ac­tion. Lenders’ on­go­ing gath­er­ing of mar­ket in­tel­li­gence, again de­pend­ing on the lev­el of de­tail, may al­so pro­vide in­for­ma­tion ca­pa­ble of af­fect­ing com­pet­i­tive be­hav­iour. The Report re­gards this risk as high­er in the project fi­nance/in­fra­struc­ture sec­tor, since there is less in­for­ma­tion gen­er­al­ly avail­able to prospec­tive lenders. Where a lead arranger has been ap­point­ed, shar­ing of in­for­ma­tion be­yond the lim­its set by the bor­row­er may al­so have re­stric­tive ef­fects. These con­cerns arise both where in­di­vid­ual lenders are to be ap­point­ed and where com­pe­ti­tion takes place among bank con­sor­tia formed in ad­vance.

At the time of the agree­ment on fi­nal loan terms, it fol­lows nec­es­sar­i­ly that de­tailed in­for­ma­tion will flow be­tween lender banks; the Report how­ev­er finds this to re­sult in lit­tle com­pe­ti­tion risk, ei­ther be­cause such dis­cus­sions take place bi­lat­er­al­ly be­tween the bor­row­er and each lender, or that dis­cus­sions among lenders are cir­cum­scribed by the man­date.

This said, the Report ac­knowl­edges that the ex­changes de­scribed above may well be jus­ti­fied un­der com­pe­ti­tion law; in par­tic­u­lar, con­tacts en­tered in­to with the con­sent of the bor­row­er are viewed as as po­ten­tial­ly nec­es­sary and thus jus­ti­fied.

At the pri­ma­ry syn­di­ca­tion stage, the Report views a pos­si­ble con­cern in con­duct based on reci­procity among lenders in re­spect of par­tic­i­pa­tion in the syn­di­cate. Basically, par­tic­i­pat­ing lenders would act as a sin­gle group with re­spect to the loan terms, which may lead to an in­crease in the pric­ing of the loan where that in­crease were not jus­ti­fied.

The Report more­over dis­cuss­es the risk of col­lu­sion re­gard­ing an­cil­lary ser­vices, such as hedg­ing and cash man­age­ment, in par­tic­u­lar their al­lo­ca­tion and/or pric­ing. Such col­lu­sion can hap­pen in its own or spill over from oth­er, le­git­i­mate dis­cus­sions among the lenders. The Report al­so rais­es the po­ten­tial neg­a­tive ef­fects of lenders sta­pling the pro­vi­sion of an­cil­lary ser­vices to the loan.

In sit­u­a­tions of events of de­fault or dis­tressed cir­cum­stances, the Report rais­es the po­ten­tial con­cern that lenders may col­lude among them in re­spect of the loan op­por­tu­ni­ties aris­ing from an event of de­fault or oth­er dis­tressed sit­u­a­tion, e.g. seek­ing to im­pose ex­ces­sive terms or ad­di­tion­al ser­vices on the bor­row­er. The Report does note that no ev­i­dence of such be­hav­iour has been found.

The Report al­so rais­es the pos­si­bil­i­ty of col­lu­sion in the sec­ondary mar­ket, where­by lenders would col­lude on how, when and at what price to sell debt. However, it finds no ev­i­dence of such con­duct.

In sum­ma­ry, the Report rais­es a num­ber of po­ten­tial com­pe­ti­tion is­sues but ap­pears, on the face of it, to iden­ti­fy lit­tle in the way of ac­tu­al ob­served con­duct in breach of com­pe­ti­tion law. The Report use­ful­ly rais­es a num­ber of mea­sures – com­pli­ance train­ing, sep­a­ra­tion of orig­i­na­tion and syn­di­ca­tion desks – which may serve to lim­it the risk of such breach­es hap­pen­ing.

The in­ves­ti­ga­tion car­ried out in the frame­work of the Report was lim­it­ed to six Member States (France, Germany, Italy, Poland, the Netherlands, Spain and the UK). It would of course be in­ter­est­ing to see whether the sit­u­a­tion is dif­fer­ent in oth­er Member States.

It re­mains to be seen what ac­tion the European Commission will take on the ba­sis of the Report. Such ac­tion, be it in the form of sec­tor in­quiry or in­di­vid­ual in­ves­ti­ga­tions, may al­so be in ad­di­tion to Member State en­force­ment ac­tion.

(1) “EU loan syn­di­ca­tion and its im­pact on com­pe­ti­tion in cred­it mar­kets”

The au­thors are Eric Halvarsson and Mats Johnsson.