EU Loan Syndication Study Identifies Areas of Potential Antitrust Risk
What has happened?
On 5 April 2019, the Competition Directorate of the European Commission published a report of a study into ‘EU loan syndication and its impact on competition in credit markets’ (the ‘Report’). The decision to commission the Report reflects a growing concern by regulators as to the establishment and conduct of syndicates in the lending and other sectors. This concern is, in part, reflected in several recent antitrust and regulatory investigations and decisions.
The study was conducted by third-party economists, retained by the Commission.
The findings in the Report are based on information obtained from voluntary telephone interviews with, and questionnaires sent to, lenders, borrowers and procurement authorities in six EU Member States. The study was not therefore conducted like an antitrust inquiry, implemented via incursive investigative measures, backed-up by enforcement powers. Indeed, the study was not designed to identify any direct evidence of collusion or abuse – and did not do so.
The completion of the Report is a fact-finding step. It is not, in itself, the trigger for the initiation of an antitrust investigation. The Commission will discuss it, however, with the national antitrust and regulatory authorities. The Report may also frame a future EU sector inquiry or, should evidence be forthcoming, antitrust and regulatory investigations into the activities of some lenders. Such evidence might, of course, come from the lenders themselves through self-reporting to the financial regulatory authorities or result from antitrust leniency applications. The Report should therefore be considered carefully.
The study focused specifically on syndicated loans for leveraged buy-outs, project finance and infrastructure finance. The Report highlights a number of situations where, according to the authors, anticompetitive conduct is susceptible to occur or produce harmful effects. It thereby provides a framework of reference for compliance in this field and should prompt firms to audit their policies, trainings and compliance systems to ensure they will hold up to scrutiny.
The analysis set out in the Report works through the different stages in the establishment and conduct of syndicates for each loan segment. The identified potential risk areas include the following:
- Market soundings: market soundings between bidders prior to the award of a mandate increase the risk of alignment or coordination on price between them, in particular where soundings are deal-specific, and information flows freely between origination and syndication teams.
- Syndicate formation: where there is only one mandated lead arranger (MLA), absent appropriate safeguards, there is an increased risk that price discussions will favour the lenders rather than the borrower.
- Club loans: there is an increased risk of coordination between club lenders, and a greater need to monitor their discussions, since they share information to align on loan terms and pricing.
- Loan restructuring: there is an increased risk of coordination on price or less favourable terms where re-negotiations are limited to the original syndicate members, rather than including new lenders to increase competitive pressure.
- Ancillary services: where other services are bundled with the loan, or the choice of provider is limited to syndicate members, the borrower risks less favourable terms than if it tenders for them separately, especially for services not directly related to the loan.
Against those findings, the Report also identifies safeguards that mitigate risks in the above areas of concern – for example:
- Duty of care to clients: firms should establish clear policies and trainings to provide clients with neutral advice (e.g. when acting as both lender and advisor), to take decisions in clients’ best interest (e.g. when forming a syndicate), and to identify and manage conflicts of interest.
- Information exchange: firms should establish clear protocols and internal information barriers for sharing information with lenders or investors at different stages of syndication (e.g. during market soundings, syndicate/club formation, and loan administration).
- No bundling unrelated services: firms should avoid bundling ancillary services not directly related to the loan. The Report noted that the UK recently banned clauses that restrict a client’s choice of future services in certain circumstances.
Why does this matter?
The Report confirms that loan syndication is an area of interest for the Commission.
The study was commissioned against the back-drop of similar antitrust scrutiny in other jurisdictions (e.g. warning letters issued to banks in the UK in 2016; antitrust investigations in Turkey and Spain resulting in fines against banks in 2017 and 2018). On announcement of the study, the Commission noted that “this area exhibits close cooperation between market participants and opaque or in-transparent settings…which are particularly vulnerable to anti-competitive conduct”.
The Report could prompt the Commission to take further action. For example, the Commission could launch a sector inquiry and in that context make use of its investigative powers to scrutinise the conduct of lenders in a more targeted fashion. Given on-going scrutiny in this area, the Commission may have already received, or may soon receive, complaints and/or leniency applications concerning loan syndication. This could result in antitrust investigations, should the Commission suspect that EU competition rules have been breached.
The Report also puts firms on notice of the areas of increased antitrust risk within their syndication businesses, and establishes a framework of reference for compliance in this field. Against this background, firms should ensure that related policies, trainings, and compliance systems are up to standard – and revise them accordingly.
More broadly, the Report highlights that inter-bank cooperation has become as much a focus for antitrust authorities as collusive misconduct between traders or dealers. Whilst antitrust law, and the Report itself, recognises the pro-competitive benefits of syndication (i.e. to enable efficient financing and risk management for large deals or projects), antitrust risks still arise. For example, three banks and several senior executives currently face criminal charges in Australia for allegedly colluding in the sell-down of a residual position in the context of a joint equity underwriting.
What happens next?
The Commission has yet to respond to the Report’s findings, or indicate whether it intends to follow up the Report with a sector inquiry or other regulatory or enforcement action.
A sector inquiry would be announced by way of decision and press release. However, should the Commission open a probe into more targeted suspicions of antitrust misconduct, it may not initially disclose such an investigation to the public.
How can Cadwalader help?
Cadwalader’s antitrust team is one of only a few to focus on the financial services sector. We regularly represent companies before the EU, UK and US antitrust authorities, and are specialists in offering ‘end-to-end’ advice on antitrust investigations and related litigation in this sector, working closely with our financial regulatory and white collar colleagues.
If you would like to discuss the issues arising in this alert, or how we can help you more generally, please contact Tom Bainbridge.