In 2017 the Directorate-General for Competition of the European Commission (DGCOMP) kicked-off a process to examine loan syndication. In an initial step, DGCOMP commissioned a study to take stock of the EU loan syndication market. The study was aimed at deepening the understanding of the syndication process and screening for areas where the competitive dynamics of the markets might be susceptible to anti-competitive collusion. DGCOMP was evidently wary that the loan syndication process exhibits features that are vulnerable to anti-competitive conduct.
On 5 April 2019 the long-awaited study was published. The study sets out a comprehensive description of the syndication process with a focus on leveraged buy-out financings, project finance and infrastructure finance. It then details various potential areas of "friction" through the syndication process (stage-by-stage analysis), where the loan syndication process may pose antitrust risks.
What are the main take-aways?
The study does not challenge loan syndication as such. It recognizes that syndicated loans are beneficial in that they enable institutional investors/banks to provide loans for projects which may be too large or risky for an institution to finance alone. Interestingly, there is remarkably little discussion in the study as to what scale of financing / risk would render loan syndication legitimate.
Rather, the study considers compliance with the instructions/mandate from the borrower / the sponsor to the arranging banks as an important "pointer" for the lawfulness of the syndication (albeit without wanting to pre-empt DGCOMP's views). At the same time, the study caveats that the adherence to the instructions/mandate would not provide a "safe-harbor" for potentially collusive behavior that the syndicated lending process may facilitate, or that may go beyond the borrower's instruction (spill-over practices). By this token, the study singles out various competition law risks that can arise in the syndication process, including the following:
- Formation of the syndicate / information exchange (notably market sounding): The study warns that overshooting information exchange may be at risk to become a conduit for pricing information that compromises a competitive bidding process when forming the syndicate. It differentiates between generic and specific market soundings; specific sounding would need the borrower/sponsor consent to be compliant. While the risk for competitive harm is considered highest pre-mandate (in the bidding process), the study also flags post-mandate risks, such as aligning different pricing propositions of syndicate members;
- Making use of the market flex provision: The study identifies discussion between the Mandated Lead Arrangers (MLAs) on whether the flex mechanism should be triggered as potentially sensitive. Anti-competitive collusion would arise if the flex is used to increase the price in circumstances where the financing could in fact be raised without such action being necessary, or if terms are flexed beyond a level that is necessary to secure the financing;
- Allocation of ancillary services across banks and the pricing of such services: The study raises potential concerns about the MLAs / lending banks making the provision of connected services one of the conditions attached to the lending. Potential risks would include the discussion among lenders to share the services (e.g. hedging) between them and/or coordinating the price, as well as uncompetitive bundling of these services with the initial lending which would restrict the choice for the borrower/sponsor;
- Coordination by lenders on the sale of the loan on the secondary market: If underwriting banks were to coordinate (subsequent to any coordinated sell-down – primary syndication – agreed with the borrower/sponsor) in relation to when to sell, what proportion to sell or at what price to sell the debt in the secondary market, such coordination could be anti-competitive;
- Refinancing in conditions of default: Syndication may confer (dominant) market power to a syndicate, leading to a sub-optimal outcome, in particular in a situation where a borrower is in financial difficulty. For example, if lenders together were to impose conditions for a debt restructuring which are not objectively justified, including charging excessive prices as a condition to the refinancing/restructuring.
What is next?
The study will be the reference point for further actions of DGCOMP. It is too early to venture a guess as to whether DGCOMP will take enforcement action, though it is fair to assume that DGCOMP and the national competition authorities will have syndicated loans "on their radar". Potentially, DGCOMP might want to firm-up the findings of the study with a targeted sector inquiry (as was done in other sectors). This would entail an in-depth probe into the areas which the study identifies and ultimately could lead to case-enforcement.
In light of the holistic approach of the study, i.e. the study also points to other (non-antitrust specific) aspects of the syndication process, the study could well serve as the ground-work for a joint guidance paper of DGCOMP and EU financial services regulatory bodies.
What can lenders do?
While highlighting several areas of concern, the study helpfully details various safeguards. These include proper documentation of the mandate relation with the borrower/sponsor, separation of origination and syndication desks, compliance trainings for staff, internal guidance manuals etc. Persons involved in syndicated loan markets, in particular in arranging syndicated loans, should carefully review the findings of the study.