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.
The Study shall identify and assess the main characteristics and competitive dynamics of the loan syndication market, with a view to identifying potential competition issues. It is intended to provide the Commission with detailed factual information on the loan syndication markets in six EU Member States based on direct information from market participants through stakeholder interviews based on agreed questionnaires.
The technical specifications of the tender suggest that the Study will be split into two sections:
(i) Assessment of the EU loan syndication market – which will include a comparative qualitative and quantitative assessment of the loan syndication markets in the target countries with regard to:
- Project financing (including the effects and enforcement of regulations, such as public procurement rules);
- Leveraged buyouts (including the effects of time constraints and limited transparency); and
- Infrastructure projects requiring cross-border financing and execution (focused on the largest projects and those financed with EU funds).
The Commission is looking for an examination of the loan syndication market, both from a lender and borrower perspective, with a focus on the economic benefits and drawbacks of syndication, a description of syndication typologies, lender roles and types of borrowers, composition and operation per type of borrower, relevant regulatory/enforcement framework and market growth/outlook.
The Study will also need to analyse the effects of regulatory requirements (liquidity coverage, leverage ratios) on loan portfolio realignments, analysing the increasing focus on higher-risk loans, effects on lending volume and wholesale funding costs and shifts in lender/borrower bargaining strength.
Last but not least, the Study will need to delve deeper into market evolution issues, including;
- Disintermediation of banks by nonbank investor groups, practical relevance of best-effort syndication, increasing market transparency through mark-to-market pricing, practical relevance of public loan ratings, use of structured products such as CLOs and LCDS.
- The roll out of blockchain technology for recording, managing and securing syndicated transactions (smart contracts, common datasets), new functionalities including scheduled debiting, automatic collection and conditional term adjustments and potential value added such as faster settlements and traceability.
(ii) Assessment of key elements of loan syndication from a competition perspective – this will focus on the most relevant competition concerns surrounding syndicated lending.
In the loan origination stage, the Commission is interested in:
- The nature of information exchange and risk of anticompetitive coordination before closure;
- The effects of existing client relationships between (potential) lead arrangers and borrowers, contacts between lenders during "market sounding", during preparation of bank book by arrangers (investigating prices at which investors are willing to invest, rates, fees), during kick-off bank meetings;
- The scope and effects of non-disclosure requirements determining confidentiality duties of lead arrangers and other lenders;
This will include an analysis of communication between lenders during the market sounding and book building process, and the scope and effects of non-disclosure agreements between prospective lead arrangers and borrowers.
The Commission is also interested in the operation of the syndicated during the loan syndication stage - the Study will therefore also focus, specifically, on the effect of contract terms, including flexing provisions, ancillary services and cross-selling, as well as recurring standard clauses related to restructuring and refinancing.
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.
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.
If you are involved in syndicated lending and/or other multi-bank deals, the following are a few golden rules to live by:
- Determine your commercial strategy independently of the other syndicate members.
- Before entering into negotiations with other lenders, obtain borrower consent before contacting competitors and document that consent.
- Do not discuss pricing or future commercial strategies in relation to a particular borrower with other actual or potential competing lenders.
- Do make sure that adequate procedures are in place so that a facility agent cannot pass on any commercially sensitive information to other departments of the bank where it could be used to formulate future strategy.
- Do train all staff involved in the syndication process to make sure their conduct complies with competition rules.
- Do ensure that your staff is able to spot potential breaches of competition rules and there is an appropriate reporting mechanism to enable your organisation to become aware of such breaches and eliminate or mitigate their effects promptly.