As a result of the announcement by the European Commission in its 2017 Management Plan that it will possibly engage in a sector inquiry under Article 17 of Regulation 1/2003 of the Treaty on the Functioning of the European Union of potential competition issues in loan syndication, banks and other financial institutions that act as arrangers and/or lenders in multi-lender leveraged lending transactions can expect increased scrutiny of their conduct with respect to compliance with antitrust and competition laws, not only in European lending but in the United States and elsewhere in the world. In announcing the possible sector inquiry, the European Commission noted that leveraged lending “exhibits close cooperation between market participants in opaque or in-transparent settings, ... which are particularly vulnerable to anti-competitive conduct. Work will focus on obtaining relevant information on market structure, dynamics between market participants and potential competition issues.”
While to date the European Commission has not announced the timing of any sector inquiry, it would typically be followed by formal investigations and enforcement actions against violators. (The European Commission has launched seven sector inquiries under Regulation 1/2003.) If a sector inquiry proceeds, lenders and arrangers will likely be obligated to respond to voluminous information requests over the course of a typically two-year process culminating in preliminary report soliciting comments, followed by a final report. Quite often, other regulatory and prosecutorial authorities will launch “me too” investigations or use information unveiled to further regulatory or enforcement proceedings.
An area of principal concern is lender/arranger conduct during the “precommitment phase” of a financing, when lenders and/or arrangers compete with each other to obtain economics and titles and roles, which are typically determined at the time a commitment letter for the financing is executed. Sponsors and borrowers use the competitive dynamic to obtain the most borrower-friendly terms possible, while lenders and arrangers balance the desire to obtain the most economics and the most favorable titles and roles against the risks of an inability to syndicate the loan, because pricing and terms that were too borrower-friendly were committed to or because the market moves to less borrower-friendly pricing and/or terms between the time of commitment and syndication. Collusion among lenders/arrangers at this phase — such as sharing of confidential competitive information regarding pricing, leverage, flex and/or other terms a lender/arranger is willing to provide the sponsor/borrower — is an example of potentially inappropriate conduct.
At present, many large banks that act as lenders and arrangers are highlighting their policies against inappropriate conduct and engaging in robust compliance training regarding these and other antitrust compliance areas of concern. It is important to note that certain of these policies require recipients of incoming inquiries and contacts that are deemed to be potentially inappropriate to report the identity of the individual making the inquiry or contact, and the substance thereof, to compliance personnel. Other institutions, including debt funds and alternative lenders, are advised to formally adopt policies and procedures that address these concerns and formalize compliance and training programs with respect thereto. Whether or not a financial institution is subject to banking regulation, it is subject to liability for violation of the antitrust laws.