The European Commission has recently published a report on the loan syndication market and its impact on competition in credit markets. The report identifies a number of competition law issues which may lead to increased scrutiny of the European syndication markets by European competition authorities.
In 2017, the European Commission commissioned a study to analyse the loan syndication market, in view of its importance as a “major contributor of debt finance, particularly in terms of large-scale debt”, and to identify competition law issues which might arise from it. On 5 April 2019 the final report (“the Report”) was made public, and it identifies a number of competition law concerns. (1)
The main concern identified is the flow of commercially sensitive information between lenders.
The Report finds that during the period until the formation of the lender group, i.e. when final terms are agreed and the original lenders are mandated, such information flow may occur through market soundings by the lending institutions regarding a transaction. Depending on the level of detail of such contacts, they may entail the sharing of pricing information specific to a transaction and thus reduce competitive pressure by sharing of future competitive intent, thereby affecting lenders’ conduct in respect of that transaction. Lenders’ ongoing gathering of market intelligence, again depending on the level of detail, may also provide information capable of affecting competitive behaviour. The Report regards this risk as higher in the project finance/infrastructure sector, since there is less information generally available to prospective lenders. Where a lead arranger has been appointed, sharing of information beyond the limits set by the borrower may also have restrictive effects. These concerns arise both where individual lenders are to be appointed and where competition takes place among bank consortia formed in advance.
At the time of the agreement on final loan terms, it follows necessarily that detailed information will flow between lender banks; the Report however finds this to result in little competition risk, either because such discussions take place bilaterally between the borrower and each lender, or that discussions among lenders are circumscribed by the mandate.
This said, the Report acknowledges that the exchanges described above may well be justified under competition law; in particular, contacts entered into with the consent of the borrower are viewed as as potentially necessary and thus justified.
At the primary syndication stage, the Report views a possible concern in conduct based on reciprocity among lenders in respect of participation in the syndicate. Basically, participating lenders would act as a single group with respect to the loan terms, which may lead to an increase in the pricing of the loan where that increase were not justified.
The Report moreover discusses the risk of collusion regarding ancillary services, such as hedging and cash management, in particular their allocation and/or pricing. Such collusion can happen in its own or spill over from other, legitimate discussions among the lenders. The Report also raises the potential negative effects of lenders stapling the provision of ancillary services to the loan.
In situations of events of default or distressed circumstances, the Report raises the potential concern that lenders may collude among them in respect of the loan opportunities arising from an event of default or other distressed situation, e.g. seeking to impose excessive terms or additional services on the borrower. The Report does note that no evidence of such behaviour has been found.
The Report also raises the possibility of collusion in the secondary market, whereby lenders would collude on how, when and at what price to sell debt. However, it finds no evidence of such conduct.
In summary, the Report raises a number of potential competition issues but appears, on the face of it, to identify little in the way of actual observed conduct in breach of competition law. The Report usefully raises a number of measures – compliance training, separation of origination and syndication desks – which may serve to limit the risk of such breaches happening.
The investigation carried out in the framework of the Report was limited to six Member States (France, Germany, Italy, Poland, the Netherlands, Spain and the UK). It would of course be interesting to see whether the situation is different in other Member States.
It remains to be seen what action the European Commission will take on the basis of the Report. Such action, be it in the form of sector inquiry or individual investigations, may also be in addition to Member State enforcement action.
(1) “EU loan syndication and its impact on competition in credit markets”