The key competition law concern arising from the operation of a market disruption clause is that it could result in an exchange of competitively sensitive information between lenders, potentially leading to the coordination of their behaviour in the market in a way which would be considered anti-competitive. Such concerns are not exclusive to market disruption clauses, but can arise in any context where actual or potential competitors reveal commercially sensitive information to each other.
The problem is most likely to arise if, in a market disruption event notice sent to the facility agent, an individual lender provides competitively sensitive information (such as its cost of funds) and the facility agent passes this information to the other lenders in the syndicate. As the lenders are likely to be competitors in the wider market, receipt of this sort of competitively sensitive information has the potential to have an impact on their competitive behaviour in that wider market.
Although competition law is typically concerned with information exchanges on pricing levels, where likely pricing levels can be (easily) inferred from information on costs (as could be the case with awareness of other bank’s cost of funds), information exchanges on costs may be treated as tantamount to information exchanges on prices - a serious competition law concern. These concerns are accentuated in the current climate where lenders may be triggering market disruption clauses in a number of loan agreements at around the same time and therefore where information on each other’s cost of funds will be particularly sensitive.
Competition law concerns will be avoided if the facility agent keeps the competitively sensitive information to itself, merely passing on the existence or outline of the market disruption event notice. Even if the lender has asked that the competitively sensitive information be forwarded to other lenders in the syndicate, the facility agent should refuse to do so (e.g. by relying on its overriding right to decline to do something which might constitute a breach of law).
For similar reasons, direct disclosure or discussion of competitively sensitive information between lenders should be avoided.
As a matter of jurisdiction, it is worth noting that EC competition law applies to agreements which have effects in the EU, so the fact that one or more of the parties is located outside the EU will not necessarily rule out the application of EC competition law. Equally, equivalent competition laws in other jurisdictions (over 100 now have some form of competition law) may well mean that an agreement is subject to competition law even if it does not have any effect in the EU.
Precautions to minimise competition risk
The following steps will help minimise risk of competition law concerns arising in loan renegotiations where a market disruption clause has been triggered:
- All commercially sensitive communications within the syndicate are carried out via the facility agent, and there are no direct communications between syndicate banks of sensitive information such as cost of funds. It is better if all commercially sensitive discussions after a market disruption clause has been activated are carried out between, on the one hand the borrower and the facility agent, and on the other, the agent and each respective lender.
- The facility agent should avoid revealing commercially sensitive information relating to one lender (such as cost of funds) to other members of the syndicate, either directly or indirectly.
- The agent should be cautious about taking a pro-active approach with regard to negotiating a substitute basis for the loan as this could lead to competition concerns, e.g., it could end up effectively setting standard substitute terms across the market at a higher level than would otherwise have been the case. The suggestion is that to avoid this blanket effect it is best to wait for the borrower to request negotiations in each case. However, it should not be an absolute bar to the facility agent beginning negotiations, provided that care is taken to deal with each case individually.
- The facility agent ensures that information it receives in its role as agent does not flow to other areas of its own bank (where it might influence future practice). This can be achieved by erecting an information barrier between teams, or by requiring employees transferring from the agency function to the areas of the bank responsible for lending to spend some time on gardening leave or occupied in another area.
- Similar precautions to those outlined above should be implemented in the borrower to the extent that it is also a lending bank in other syndicates. This will ensure that, where the borrower has details of the cost of funds of lending banks in the syndicate, these are not internally transferred to the borrower’s lending arm.