European Commission Publishes Final Study on Antitrust in EU Loan Syndication

  • European Union
  • 04/17/2019
  • Morgan & Lewis

In its recent assessment of the European loan syndication sector from an antitrust perspective, the European Commission did not find specific evidence or indication of any current antitrust infringements. However, the Commission and national competition authorities will likely closely monitor this sector going forward, so market participants should ensure they have in place appropriate antitrust compliance safeguards regarding loan syndication activities across all segments of syndication across all EU member states. As the same market structure and antitrust doctrinal considerations detailed in the assessment apply equally to loan syndication markets throughout the world and, most notably, in the United States, market participants should be similarly vigilant in their antitrust compliance effort.

The European Commission published its final report of the study, “EU loan syndication and its impact on competition in credit markets” on April 8. The study, which the Commission tendered in 2017, follows the authority’s increasing interest in the financial services sector and a significant number of investigations into financial products. It is the first comprehensive assessment of the European loan syndication sector from an antitrust perspective and discusses whether the competitive dynamics in loan syndication scenarios may raise competitive concerns. Against this background, the study identifies specific competition risks and suggests certain critical safeguards that lenders should observe to ensure that effective competition in the loan syndication process remains unaffected.

Study Scope
Syndicated loans are considered a significant capital source in large-scale lending in Europe, particularly with regard to leveraged buyout activities (LBOs), project finance (PF), and infrastructure projects (INFRA). The study assesses the competitive dynamics of these segments in six sample EU member states, i.e., France, Germany, Netherlands, Poland, Spain, and the United Kingdom, which together account for around three-quarters of the EU’s LBO, PF, and INFRA-related syndication loans. With particular focus on the aforementioned segments, the study analyzes the loan syndication process stage by stage, including the competitive bidding in order to form the lead banking group (RFP process), the general syndication phase, and the provision of ancillary services (e.g., hedging services). In addition, the study looks at the role of debt advisors throughout the whole process. The use of debt advisors who are also part of the loan syndicate—often in the role of the mandated lead arranger (MLA)—is widespread among borrowers.

Study Findings
Against the above background, the study identifies competition risks that may result in suboptimal loan terms or other collusive outcomes to the borrower’s disadvantage. The main risks identified include the following:

The potential exchange of competitive relevant information in the course of RFP processes that might have a negative effect on the final submitted bids. According to the study, this holds especially true with regard to PF and INFRA financing due to the comparatively low availability of information to assist a potential lender in preparing its proposal.
The general risk that banks as part of a loan syndicate potentially observe one another’s behavior and strategies throughout a financing project, possibly leading to (tacit) coordination with respect to future loans or refinancing in case of default.
Potentially collusive discussions within the loan syndicate in order to share ancillary services among the syndicate members, coordinate the respective pricing, or bundle such services. According to the study, the allocation of ancillary services is regularly part of the initial agreement on loan terms.
The granting of a loan on potentially uncompetitive terms in case the borrower uses a debt advisor that is also part of the loan syndicate.
In addition, the study stresses that borrowers facing financial difficulties or even default are generally vulnerable to anticompetitive behavior.

While the study identifies loan syndication as being subject to certain competition risks, it concludes that the probability that these risks materialize in a specific infringement is moderate to low. In general, the market segments the study assesses are not highly concentrated. However, in this regard the study notes that there is a slight difference between the main loan syndication markets (i.e., France, Germany, and the United Kingdom) and smaller markets characterized by lower deal frequency and the use of nonmainstream currencies (e.g., Poland). While, for example, the study identifies “at least 12–15 credible MLAs” in the LBO segment in the main western European markets, in Poland that number is estimated to be 6–8. With regard to loan pricing and terms as well as controlling RFP processes, borrowers in general would be highly sophisticated. An exemption might only apply in cases where, for example, municipal authorities without prior experience in syndicate loans act as borrowers.

Nevertheless, the study recommends a number of critical safeguards that can help mitigate the various competition risks connected to loan syndication in practice. Such safeguards include the following:

Avoidance of unwarranted information exchange. To prevent any potential exchange of competitive relevant information in the course of loan syndication, the key safeguard for loan originating banks would be to implement enforceable protocols providing how and in what form (e.g., aggregated and anonymized) the deal-relevant information obtained by the bank’s syndication team from other potential syndicate banks can be transferred to the same bank’s loan originating team.

From a borrower’s perspective, respective nondisclosure agreements should be used during RFP processes and potential lenders should be kept separate as long as possible.
Banks’ duty of care to clients. First, banks acting as MLAs should ensure that during a project all alternative options are presented to the borrower. This includes inviting potential new lenders (subject to the borrower’s consent), considering and laying out possibilities to restructure the loan, or involving the borrower in bilateral negotiations before aligning loan pricing or terms upward. Second, banks acting as MLAs or participating in loan syndicates should train their relevant staff with respect to the “identification and management of conflicts of interest,” and “provide clarity as to duty of care to provide neutral advice to clients.” This applies in particular where the MLA, directly or indirectly through an affiliate, also serves borrowers as a debt advisor.
Promotion of unbundled price competition. To prevent potentially collusive discussions within the syndicate concerning the provision of ancillary services, the study finds that it is advisable for loan syndicates to carefully manage and limit the cross-sale of services in order to avoid the risk of impairing competitive conditions in neighboring markets to the loan syndication. In case certain ancillary services are not directly linked to the loan (e.g., M&A advisory), the study recommends keeping such ancillary services completely separate.
Outlook
Even though the study does not find specific evidence or indication of any current antitrust infringements in the area of loan syndication, it must be expected that the Commission and national competition authorities will carefully consider the study’s findings and closely monitor the loan syndication sector going forward. Enforcement actions could include the initiation of a formal sector inquiry or even individual investigations. However, any competition regulator will have to carefully consider its course of action in order to maintain the functioning of the syndicated loan markets, even more so in the current low interest rate environment in Europe. In any event, market participants should ensure they have in place appropriate antitrust compliance safeguards with respect to their loan syndication activities across all segments of syndication across all EU member states. In addition, the same market structure and antitrust doctrinal considerations detailed in the study apply equally to loan syndication markets throughout the world and, most notably, in the United States, where market participants should be similarly vigilant in their antitrust compliance efforts.

Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Brussels
Christina Renner
Izzet M. Sinan

Frankfurt
Michael Masling

London
Joanna Christoforou
Frances Murphy
Omar Shah

New York
Richard S. Taffet

Washington, DC
Jon R. Roellke

https://www.morganlewis.com/pubs/european-commission-publishes-final-study-on-antitrust-in-eu-loan-syndication