On 8 April 2019, the European Commission (the “Commission”) published a third party report into the impact on competition of syndicated lending (the “Report”). Although there has not been significant competition law enforcement action in this area to date, many have identified syndicated lending as a key area of potential risk for banks. Further, whilst the Report does not constitute official Commission guidance, the areas of concern it identifies may provide a basis on which the Commission will direct its future enforcement efforts. Similarly, the suggested means of addressing those concerns may become a new benchmark against which banks are judged.

The study

In its 2017 Management Plan, the Commission said it may engage in a study on potential competition issues of loan syndication on the basis that: “This area exhibits close cooperation between market participants in opaque or in transparent settings.”

In April 2017, the Commission announced it was looking for third parties to carry out a study into loan syndication in six EU Member States (Germany, France, the Netherlands, Poland, Spain and the UK) and focusing on segments of the syndicated loan market connected with LBOs, project finance and infrastructure finance. The aim of the study was to assess the effectiveness and functioning of the loan syndication market and to identify any potential competition concerns. The contract to carry out the study was awarded in September 2017. The final Report is available here.

Key areas of concern & how they may be addressed

The Report identifies the competition law risks which may arise at each stage of the syndicated loan process and suggests ways in which they may be mitigated. The stages of the process during which the Report suggests the most significant competition law risks are likely to arise are as follows:

Formation of the lead banking group

request of the borrower then, provided the bank group operates within the instructions of the borrower and any discussions or agreements do not go beyond what is required for the purposes of submitting the joint bid, the Report suggests that the competition law risk is low.

In some cases, the borrower will instead appoint the lead bank(s) by way of a competitive bidding process. In this scenario, absent any clearly problematic behaviour involving, for example, agreements between competing banks to align their offerings, the key competition law risk is of banks exchanging commercially-sensitive information which is not indispensable to the syndication process. This may involve, for example, a bank which is bidding for a lead role engaging in ‘market soundings’ and obtaining detailed information from potential market participants about their future intentions, which goes beyond what is required to understand those potential participants’ appetite for the deal and the price at which they are willing to invest.

Ways in which the Report suggests banks may mitigate this risk include:

  • Ensuring that they have a separate syndication team which is responsible for gathering general market intelligence on lenders’ appetite for loans and that it provides no deal-specific information to the origination team (i.e. the function responsible for negotiating the price and other loan terms with the borrower and other lead banks);
  • Providing tailored training or guidance for origination and syndication functions within the bank regarding the information they are permitted to exchange with other banks within their respective roles; and
  • Obtaining the express (and freely given) consent of the borrower to exchange the information in question at the relevant stage of the process (for example, pre- or post-mandate). In its strongest form, this consent should be specific as to who is contacted.

Post-mandate to loan agreement

At this stage of the syndication process, discussions between the banks for the purposes of agreeing the terms of the loan should not raise any concerns, provided they do not go beyond what is necessary.

However, the Report highlights the increased competition law risk at this stage of the process in markets with a small pool of eligible lenders. The Report identifies project/infrastructure finance in non-€/£ markets, such as Poland, as falling into this category. In these markets, repeat interactions between lenders may make collusion more likely.

The Report does not suggest ways in which this risk can be mitigated but banks may consider it appropriate to identify particularly high-risk markets in which they provide syndicated lending and provide tailored training and guidance to staff to address this.

Ancillary services

In relation to ancillary services which may be acquired in conjunction with a loan (such as hedging, cash management and FX services), the Report identifies the risk of a competition law breach where banks agree or discuss amongst themselves the terms on which they will provide such services, in circumstances where the borrower has no knowledge of the banks’ conduct and expects them to provide competitive bids, the terms of which they have arrived at independently. This was a feature of the conduct which led the Spanish Markets and Competition Commission to fine four banks fined €91 million in February 2018 for colluding to fix the price of interest-rate derivatives attached to syndicated loans.

The Report also identifies a potential competition law risk as arising where the syndicate banks require the borrower to procure a service from one or more of the lending banks which is not directly related to the underlying loan. In this respect, the Report found that 35% of borrowers/sponsors participating in the research considered that lenders seek to bundle services not directly related to the loan into the loan negotiation. Such services particularly focused on (a) activities connected to further financing (for example, around replacing a bridging facility), (b) advisory services and (c) investment research. Lender fieldwork also indicated that both “right of first refusal” and “right to match clauses” were in use. Lenders operating in the UK will be aware that the Financial Conduct Authority recently banned regulated firms from using “right of first refusal” provisions, except in relation to bridging finance.

The safeguards suggested by the Report to minimise these competition law risks is for banks to:

  • ensure that they understand which services the borrower expects the syndicate of lenders to bid for independently and comply with those wishes; and
  • consider carefully whether it is appropriate to require the borrower to procure services unrelated to the loan from the syndicate.

Secondary loan market trading

Post-syndication cooperation between members of the bank group could give rise to competition law risks. Such cooperation may include, for example, an agreement between underwriting banks (subsequent to any coordinated sell-down agreed as part of the original loan negotiations 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. The Report suggests that the best way for banks to mitigate this risk is via guidance and training to relevant staff.

Default & refinancing

Where a future lending opportunity arises, there is a risk of the current lending banks breaching competition law by discussing the terms they will put to the borrower without the borrower’s consent. An additional risk exists where the borrower is in financial difficulties since the current lenders may enjoy some sort of market power, particularly if the rest of the market is not willing to provide new finance. The Report found that in 38% of cases of refinancing, negotiations were conducted only with members of the existing syndicate.

In these circumstances, the Report concludes that it cannot be excluded that the imposition by the banks of certain conditions on restructuring which are not objectively justified could constitute a breach of competition law. Such behaviour may involve tying the purchase of other services to the refinancing or imposing excessive prices as a condition to the lending. Objective justifications for such behaviour may include that it is necessary to protect the banks’ investment or it reflects a higher degree of risk in any restructuring.

What does this mean for banks?

In the two years since it announced this study, the Commission’s focus on seeking out competition law infringements in the financial services sector has shown no sign of abating.

As mentioned at the outset, the Report does not constitute official Commission guidance as to its key areas of concern in relation to syndicated lending. However, the areas of potential competition law risk identified in the Report may provide a basis on which the Commission (and other authorities) direct their future enforcement efforts. Banks may therefore want to consider how the key risks identified above apply to them and whether they should be taking any of the steps the Report suggests to address them.