Syndicated lending under the European Commission spotlight

On 11 April 2017, the European Commission (the Commission) published notice of a EUR 250,000 tender to conduct a systematic analysis of the EU loan syndication market and its possible implications for competition policy (the Study). The launch of this Study marks the latest step in growing regulatory interest across Europe into potential competition issues arising from loan syndication activities.

Overview of the Study

The Study to be conducted by a third party provider shall provide the Commission with:

• an overview of the EU loan syndication market, (i) focussing on six Member States, and any related cross-border effects; (ii) with regard to project finance, leveraged buyouts and infrastructure projects; and (iii) from both a lender and a borrower perspective;‎
• an assessment of the issues the Commission may use for assessing the competitive environment; and
• a theoretical and empirical review of literature relating to the competitive dynamics of the loan syndication market.

The Commission estimates that the Study shall commence during the fourth quarter of 2017, and will take 9 months. The Invitation to Tender, Technical Specifications and a draft of the contract are available here.

Background to the Study and competition law risks

Publication of this tender is in line with the Commission's 2017 Management Plan, which referenced a possible study into the potential competition issues of loan syndication, and in which the Commission noted that "this area exhibits close cooperation between market participants in opaque or in-transparent settings, such as over-the-counter (OTC) activities, which are particularly vulnerable to anti-competitive conduct."‎

It is generally recognised that syndicated loans are beneficial in that they enable institutional investors/banks to collectively provide borrowers with loans for projects (e.g. acquisitions, buyouts, infrastructure investments) which may be too large or risky for an institution to finance alone. However, competition law risks may arise in the syndicated loans market both during the process before a lending group is formed (loan origination), and when selling the loan into the secondary market (loan syndication).

At the loan origination stage, lead arrangers will typically engage in "market soundings" to test investor appetite for subsequent loan syndication. This raises the potential complication of potential investors being approached by prospective lead arrangers in relation to the secondary market, whilst they are simultaneously negotiating with the borrower in the primary market. Discussions during the market sounding process therefore need to avoid the risk of constituting an exchange of competitively sensitive information between competitors for the primary loan and possibly infringing competition law (in particular, Article 101 TFEU).

At the loan syndication stage (after the lending group has been formed), the lead arrangers are generally mandated to enter into discussions with other lenders. Bi-lateral discussions between lenders that fall outside the terms and scope of the loan agreement and which serve to restrict competition including pricing for the secondary market opportunity may also raise competition law risks.

Previous regulatory interest

In line with the Commission's recent focus on other areas of financial services (for example its investigations into credit default swaps and interest rate derivatives), this voyage into syndicated loans is the Commission's first comprehensive assessment of this capital market segment. However, the Commission is not the only institution to have recently directed the spotlight on this market. For example:

• the Dutch national competition authority conducted market studies into the syndicated loan market in 2010 and the property finance industry in 2011, and ultimately found evidence of limited choice for borrowers;
• in the UK, the Financial Conduct Authority (the FCA) uncovered evidence suggesting potential competition law infringements by firms engaged in syndicated lending in August 2016, concerning the disclosure/exchange of competitively sensitive information relating to lending terms and conditions. The FCA has responded by issuing formal 'on notice' letters to firms, which led to firms strengthening their competition law compliance practices; and
• the Loan Market Association published a notice on the application of competition law to syndicated loans in May 2014, recommending caution in relation to certain activities in this context (for example, when conducting general market soundings).‎

Content of the Study

The tender document suggests the Study will be split into two broad sections, i.e.:

1.   An assessment of the EU loan syndication market

This will include a comparative quantitative and qualitative overview of loan syndication markets in Germany, France, the Netherlands, Poland, Spain and the United Kingdom. The material scope of the Study is relatively broad, and, as noted above (excluding "plain vanilla" loans), will cover the syndication process with regard to:

• project finance (including the effects and enforcement of regulation, 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 (with an emphasis on the largest projects by volume and those financed (or co-financed) by European Union programmes).

The Study shall also examine the loan syndication market from the perspective of both lenders and borrowers. This will involve an analysis of the economic benefits and drawbacks of syndication for lenders and borrowers and a qualitative and quantitative description of syndication typologies.

The Study will also consider market regulation and evolution, and the Commission has highlighted, for example, the impact of the disintermediation of banks from non-bank investor groups, the practical relevance of best-effort syndication, increasing market transparency, credit ratings, the use of structured products, and the roll out of blockchain technology.

2.   Assessment of key elements of loan syndication relevant for competition

At a high level, this shall involve an assessment of the most important competition law issues arising in connection with the subject matter of the Study, with a particular focus on the Member States falling within its geographic scope. The Commission is also seeking a general study of the competitive dynamics in the market, including the effects of liquid secondary trading, projects and volumes, and differences in bargaining strength between lender tiers in relation to borrower types.

Further to the competition law risks outlined above, the Commission is also requesting an assessment of the nature of information exchange and risk of anti-competitive coordination during the loan origination stage. 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 concerned with the formation and operation of the syndicate during the loan syndication stage. The Study will therefore assess, in particular, the effect of contract terms, including flexing provisions, ancillary services and cross-selling, as well as recurring standard clauses relating to restructuring and refinancing.

Finally, in line with the market evolution points noted above, the Commission is also interested in the future of the syndicated loan market, and the resulting impact on competitive dynamics, for example the potential benefits to funding under European Union programmes (such as the European Fund for Statement Investments).

Next steps and implications for financial institutions

The Study is intended to involve a "sufficiently representative" number of telephone interviews with and questionnaires for lenders (and EU public lenders), borrowers, and relevant regional or national procurement authorities in each of the six Member States. Financial institutions can therefore expect to receive information requests and/or requests for interviews during the course of this Study.

The Commission's findings will of course also be of significant interest to the industry. In particular, whilst the Study itself cannot involve enforcement proceedings, to the extent the Commission identifies any competition issues, or anti-competitive behaviour by specific undertakings, this may result in the launch of a formal sector enquiry and/or standalone competition investigations/enforcement action against the undertakings concerned.

Under its competition enforcement powers, the Commission has powers to impose fines of up to ten per cent of aggregate worldwide group turnover for a breach of Article 101 TFEU. In addition, undertakings may be subject to private damages actions and may face significant reputational damage.

The Commission will also be in discussion with the National Competition Authorities (NCAs) in relation to this issue, which may lead to NCAs launching their own investigations under national competition law. In this respect, it is noted that in addition to the fines mentioned above, anti-competitive conduct in certain Member States (such as the UK) may also result in criminal sanctions for individuals (i.e. fines and imprisonment) and director disqualification.

It therefore remains important for financial institutions in this market to ensure they have up to date and appropriate competition law compliance programmes in place, which are fully understood by all employees who engage in syndication activities, and that such programmes are implemented effectively.