On 11 April 2017, the European Commission (the "Commission") published a notice of a tender to analyse the EU loan syndication market and potential competition implications therein (the "Study"). The Study comes as no surprise, since the Commission hinted at competition concerns in the syndicated lending market in its 2017 Management Plan.
The Study will cover syndicated lending in the United Kingdom, France, Germany, the Netherlands, Spain and Poland and is expected to start in the last quarter of 2017. It should be finalised within nine months.
The Study aims to generate an overview of the EU loan syndication process related to project finance, leveraged buyouts and infrastructure projects requiring cross-border financing. It will:
- assess syndicate formation and composition; recurring contract terms; loan origination; operation; and restructuring;
- determine the impact of developments such as disintermediation and blockchain technology; and
- analyse competition issues arising from market transparency, borrower-lender dynamics and co-operation between banks at various stages of syndicated loan transactions.
An industry prone to scrutiny
The financial services market is no stranger to scrutiny. Since its famous "Lombard Club" cartel decision in 2002, the Commission has shown increasing interest in the sector.
In July 2013, the Commission raised concerns that ISDA, Markit and some member investment banks had breached EU antitrust regulations, by refusing to license, or restricting use of, intellectual property and data for exchange trading purposes. In response, ISDA and Markit committed to allow access to their intellectual property and data for exchange trading purposes under pre-defined terms. These terms will apply for ten years, during which compliance will be monitored.
More recently, in December 2016, the Commission issued fines of EUR 485 million to several banks found to have violated EU antitrust rules by colluding on Euro interest rate derivative pricing elements and exchanging sensitive information. The traders discussed regularly amongst themselves (through corporate chat rooms or instant messaging services), sharing information on their desired or intended EURIBOR submissions and exchanging sensitive information on trading positions or pricing strategies.
National competition authorities have also taken an interest in the financial services market. In August 2016, the UK Financial Conduct Authority discovered evidence suggesting competition law breaches by firms engaged in syndicated lending in the UK, concerning the disclosure of competitively sensitive information relating to lending terms and conditions.
Likewise, the Spanish competition authority is currently investigating possible anti-competitive arrangements for pricing and the exchange of sensitive commercial information in relation to interest rate derivatives used to hedge the risks of syndicated loans.
Potential competition pit-falls
While there are obvious benefits in syndicated lending (they facilitate financing for projects that may be too big or too risky for one banking institution alone), competition concerns arise in both the loan origination and the loan syndication phases.
In the loan origination phase, it is common for lead arrangers to engage in "market soundings", to test investor appetite for loan syndication. This may potentially lead to potential investors dealing with prospective lead arrangers in relation to the secondary market, while at the same time negotiating with the prospective borrower in the primary market. The market sounding process must ensure that it does not facilitate an exchange of competitively sensitive information between competitors for the primary facility.
Competition risks remain even after the syndicate is formed, as lead arrangers engage in bilateral discussions with the other syndicate members. There is risk that banks will exchange competitively sensitive information which they can use to align their behaviour during the bidding phase.
There is no specific guidance on how competition law applies to syndicated loans, but a 2014 notice of the Loan Market Association recommends that banks exercise particular caution when competing with each other on prospective multi-bank transactions.
Competition law violations trigger serious consequences including:
- Lengthy investigations;
- Fines of up to 10% of global turnover; and
- Legal and reputational costs.
What to expect
The Commission’s information gathering powers and processes are extensive. The Study must rely on a "sufficiently representative" number of telephone interviews and questionnaires for lenders, borrowers and procurement authorities in the targeted Member States. Banks in the targeted Member States should expect information requests and requests for interviews during the course of the Study.
Depending on the results of the Study, the Commission may launch a sector inquiry. If it does, cumbersome information requests and inspections will follow.
Local competition authorities may also launch individual investigations if they believe there is suspicious conduct in their jurisdiction, possibly even conducting dawn raids to extract information.
How we can help
Risks inherent to the functioning of the syndicated lending market can be reduced through proper internal procedures.
Institutions active on this market must ensure that they have adequate and customized competition law programmes, that all employees understand and adhere to these programs, and that they are effectively implemented.