Report finds that syndicated lending gives rise to some competition issues, but there are no glaring problems.
On 08 April 2019, the European Commission published its study into the syndicated lending market. The study was commissioned in April 2017, looking at syndicated lending in six Member States – the UK, Germany, France, the Netherlands, Poland and Spain. The aim of the study was to identify and assess any competition issues which arise when lenders come together to form a lending syndicate (please refer to our previous analysis of the issues when the study was launched, European Commission indicates syndicated lending is ripe for competition review).
The study found that there may be potential issues arising from loan syndication – particularly in Poland – which suggests that the Commission’s work in this area is not yet at an end. However, the study does not find that there are immediate competition problems that enforcers need to investigate, which should be reassuring to market participants.
Lending markets and competition law
Loan syndication involves lenders coming together to finance a loan, under a lead arranger lender. Banks will come together to fund a loan in this way, where the individual loan itself might be too risky or too big for one bank to take on by itself.
The study looks at specific segments of the syndicated loan market; leveraged buy-outs, project finance and infrastructure loans. It highlights that there could be competition issues in how lead arrangers work together to form syndicates, such as information exchange, collusion to facilitate market sharing and customer sharing and the vertical market power of individual lenders.
Bidding processes and market soundings
The report identified that market soundings between lenders can result in collusive outcomes because information about individual lenders’ risk appetite may be communicated back to the original team at the bank making the market sounding.
The authors recommend that in market soundings and bids:
• lines of communication should be kept bilateral between banks and the lead arranger/borrower until terms are finalised, in order to avoid any suggestion that there are inappropriate information flows
• NDAs, although important, should not be heavily relied upon to mitigate competition risk, as they are not always sufficient to manage information sharing issues. The report flags that NDAs are difficult to enforce in practice – something lenders should take note of
• borrower consent to market soundings should be obtained and should be as specific as possible, for example obtaining consent for each potential lender contacted, where possible (in project and infrastructure finance, this safeguard is not always as helpful as soundings are conducted at an earlier stage), and
• risks are lower where there is a degree of separation between syndication and origination desks, given the market intelligence function of the former and the negotiation function of the latter. The report acknowledges this might be more difficult for smaller institutions, where there are not separate teams, but recommends that at the very least, the same individuals are not involved in both syndication and origination functions if the latter involves any market soundings.
The report concludes that if market soundings and bidding processes are carefully defined to ensure lines are not crossed in both generic and specific market soundings, then market soundings will give rise to “relatively low risk”.
Post-mandate to loan agreement
The competition law risk reduces once a mandate has been fixed. However, the report notes that continued multiple interactions between lenders over time gives rise to …“a definite risk that lenders can observe each other’s behaviours and strategies, which may enable them to engage in some coordination on future loan transactions” but that the authors do not have direct evidence that this happens in practice.
Sale of ancillary services as a bundled offering
The report also examines the provision of ancillary services sold to the borrower where they are bundled with the loan, rather than being sold separately under a competitive process and/or after the loan. Whilst the report acknowledges that bundling is not necessarily in and of itself a competition law problem, it might lead to sub-par outcomes for borrowers.
In the UK, the FCA has already banned contractual ‘bundling’ via right of first refusal and right of first match clauses in loan agreements, where these relate to ancillary services not directly related to the loan. The report notes that where these arrangements are used outside of the UK, they can still give rise to competition issues.
Financial difficulties of a borrower will mean it has limited bargaining power in dealing with syndicate lenders, which might lead to worse borrower outcomes. When loans need to be restructured because there has been an event of default, the report highlights that this might give rise to collusion, where banks begin to discuss the refinancing without this being instigated by the borrower (although it notes that the study has found no evidence of this behaviour in practice).
The report acknowledges that there are already many industry safeguards against negative borrower outcomes in these circumstances:
• discussions between restructuring teams can usually only take place with borrower consent
• restructuring teams are typically kept separate to original lending teams within institutions
• often, a restructuring involves lenders from outside of the existing syndicate, which serves to limit the bargaining power of the original lenders, and
• banks’ restructuring teams also tend to undergo competition policy training.
The syndicated lending study has been a long-awaited analysis for financial markets participants active in this space, as they look to the Commission for guidance on whether their lending activities comply with competition law rules. There is a significant amount of detail in the report that should help guide market participants in this respect.
Lenders should also be reassured that the report has concluded there are no significant competition issues warranting immediate investigation by competition authorities. However, the study is also not a clean bill of health, as it points out there are potential competition risks in syndicated lending – particularly in the pre-mandate phase. Although none of these is identified as particularly high risk individually, on a cumulative basis they continue to mean that there are competition law risks which must be managed in relation to syndicated lending.
The report recommends safeguards to reduce competition risk:
• One consistent recommendation is offering training and guidance for all involved, from debt advisers to lending teams. This includes competition law, but also covers duty of care and conflict of interest training
• A second recommendation is to ensure delineation of where information is sent and received, whether that is between potential lenders or syndication and origination desks inside banks
• It is helpful that lenders’ processes make borrower consent an essential element of the syndication process.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.