In April 2019, the European Commission (EC) published a report on "EU loan syndication and its impact on competition in credit markets" (Report) prepared by the EC's legal and economic consultants. The Report focuses on three segments of the syndicated lending market in six EU member states (France, Germany, the Netherlands, Poland, Spain and the UK):
- leveraged buy-outs (LBOs);
- project finance (PF); and
- infrastructure finance (Infra).
While the Report does not represent the formal views of the EC, lenders and other stakeholders would be wise to interpret the competition risks and safeguards it identifies as a guide to future enforcement activity by the EC and national authorities.
The Report does not identify any significant issues requiring investigation by competition authorities (and does not include evidence of competition law infringements). However, the Report does identify a number of areas in the syndicated loan market which may give rise to competition issues, as summarised below. Most of these are identified as low risk.
The Report considers that those syndicated loan markets with fewer potential mandated lead arrangers (MLAs) should be subject to closer scrutiny, specifically Poland and possibly those member states where borrowing is not in sterling or euro, and smaller markets more generally.
Specific competition risk areas
Competitive bidding process before a syndicate is formed
The key competition risk is the unlawful exchange of competitively sensitive information between market participants, particularly in the context of market soundings with other potential MLAs (as opposed to exclusively with institutional investors and other types of entity that would not look to take an MLA role). This risk is relatively low where an MLA or potential MLA:
- distinguishes between generic and specific market soundings, and obtains explicit borrower/sponsor consent for the latter (potentially even specifying who may be contacted);
- requires functional separation between the syndication and origination desks; and
- acts in accordance with the terms of NDAs that govern information sharing (whilst recognising they may be difficult to enforce in practice).
The potential risk of unlawful information exchange is greater in the PF/Infra segment, where loans are more bespoke and there is limited availability of relevant information (particularly where a single MLA is appointed).
Post-mandate to loan agreement
The risk that lenders will discuss and agree loan terms (to the detriment of the borrower) is low where:
- the borrower/sponsor has agreed the key loan terms with each lender separately on a bilateral basis before bringing them together at the post-mandate stage; and
- post-mandate discussions between lenders are limited in scope (and do not include, for example, detailed information about pricing and hold strategies).
This risk is increased in the PF/Infra segment, where the borrower/sponsor may bring lenders together at an earlier stage (e.g. in a club deal), particularly where the borrower/sponsor is unsophisticated.
Provision of ancillary services
This is unlikely to be problematic where the borrower/sponsor chooses the ancillary services provider and the nature and terms of the ancillary services are agreed at the same time as the main facility, or following a competitive process post-closing. However, there is a risk that the borrower/sponsor receives a worse deal where MLAs make the provision of ancillary services by them a condition of the loan. This is flagged as being of "at least moderate concern" and includes the use of "right of first refusal" and "right to match" clauses where these relate to services not directly related to the loan. In the UK, these clauses are prohibited (where the "lock in" relates to future M&A or capital markets services), but in some other jurisdictions market participants may still be using them.
The risk of collusion between banks is higher in the PF/Infra segment, particularly for smaller markets, such as Poland, or more bespoke PF/Infra deals where the borrower/sponsor has a more limited choice of service providers.
Use of debt advisers also involved in syndicated lending
Conflict of interest is a risk where syndicate banks act as debt advisers, particularly if they are appointed without a competitive process (as is common in the PF/Infra market). This risk can be mitigated by functional separation of the advisory role and the lending role (e.g. by the use of firewalls), which should also prevent the adviser from unfairly favouring a strategy or debt structure that benefits its lending arm.
Refinancing in default scenario
There is a risk of coordination amongst the syndicate banks when they discuss restructuring in a default scenario. This is mitigated by the functional separation between lenders' restructuring teams and loan origination teams, as well as competition law training given to the former. Where the syndicate ties ancillary services to the restructuring, this can result in such services being priced on non-competitive terms, so the Report recommends future monitoring of this practice.
The competition risks identified in the Report can be mitigated as follows:
- through the use of lenders' duty of care to clients, including adequate training and policies for relevant employees at the MLAs;
- enforcing internal protocols governing information exchange (i.e. creating appropriate information barriers) between lenders' loan syndication and origination functions; and
- limiting cross-selling of ancillary services.