On 5 April 2019, the European Commission (the "Commission") published a report on EU loan syndication market and its impact on competition in credit markets (the "Report").
The Report is based on an extensive study involving lenders, borrowers and sponsors active in six Member States (the "Study"), and follows regulatory interest and investigations across Europe into potential competition issues arising from loan syndication activities. Syndicated lending raised over $1 trillion in Europe in 2018 and competition regulators will continue to closely monitor the sector. All lenders need to be aware of the risk areas identified in the Report and ensure their activities are compliant.
| what you need to know - practical takeaways |
- Financial institutions should review their compliance programmes in light of the Report, to ensure they are up to date and compliant.
- The Study was not a formal competition investigation. However, the Commission may launch a sector inquiry and/or investigations into individual companies to follow-up on issues identified in the Report.
- Loan syndication is generally recognised to be beneficial in terms of increasing liquidity and diversifying risk, and the Report found that there were a large number of lenders competing in most markets.
- However, loan syndication necessarily involves close cooperation between market participants. This may give rise to potential competition law risks. For example:
- market soundings by mandated lead arrangers ("MLAs"), particularly where contact is made with institutions that are competing with the MLA to originate the loan. Risks are greater where the sounding moves from truly generic to being deal-specific. The Report emphasises the need for documented client consent for deal specific soundings;
- exchanges of competitively sensitive information between lenders, leading to worse outcomes for borrowers. This may be due to a lack of effective separation between origination and syndication desks, difficulties in enforcing non-disclosure agreements and discussions which go beyond the scope of the client's consent;
- tying, where there is an obligation or strong expectation that ancillary services will be obtained from the MLA or the syndicate;
- the dual role of institutions as debt advisor and lender on the same transaction, where there is insufficient functional separation between the roles;
- the syndicate may have the power to increase prices on refinancing and restructuring, particularly where a borrower is in financial difficulties and has few outside options.
- The Report recommends closer monitoring of markets where there are fewer potential MLAs, such as countries which do not use the euro or pound.
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Competition risk areas during the syndicated lending process
The Report focused on syndicated lending in France, Germany, the Netherlands, Poland, Spain and the UK, in relation to project finance, leveraged buyouts and infrastructure projects. It is based on feedback from 37 lenders and 100 borrowers and sponsors and identified the following key risk areas:
| Stage in process |
Potential risks |
Safeguards |
specific comments/concerns |
| Competition for appointment to the lead banking group |
- MLA makes market soundings with other institutions who are competing to originate the loan
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- Obtain client consent for deal-specific soundings.
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- Effective functional separation between syndication desks receiving soundings and origination desks.
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- MLA also has a role as adviser to the borrower, creating a conflict of interest.
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- Effective functional separation between advisory and lending roles.
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- Dual roles more common in Project Finance/Infrastructure.
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- Bundling of advisory and lending roles at some institutions.
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- Competitive process to appoint advisor.
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| Between mandate and loan agreement |
- Discussions between lenders lead to worsened terms for borrower.
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- Bilateral negotiation of terms between borrower and each lender, with joint discussions limited to agreeing loan documentation and syndication strategy.
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- For club deals, borrower to monitor discussions between lenders and ensure they remain within the permitted scope.
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- Less sophisticated borrowers are more vulnerable.
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| Awarding of ancillary services |
- MLAs make the provision of ancillary services by them a condition of the loan.
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- Competitive process to allocate ancillary services, either alongside the initial loan terms or separately.
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- The practice of making the loan conditional on the awarding of ancillary services appears to be prevalent in Spain.
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- Higher risks where a limited number of syndicate banks can provide each ancillary service (e.g. smaller national markets and bespoke Project Finance/Infrastructure deals).
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| Sale of loan on secondary market |
- Co-ordinated activity between lenders to manipulate prices in the secondary market.
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- Borrower restrictions on secondary trading
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- No evidence of manipulation of secondary market prices was found.
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| Refinancing in conditions of default |
- Discussions between syndicate members on restructuring leads to a co-ordinated outcome.
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- Effective functional separation between restructuring teams and origination teams.
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- Limited bargaining power of the borrower, particularly in pricing of ancillary services.
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- Involving lenders from outside the original syndicate.
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Previous regulatory interest
The Report is the Commission's first comprehensive assessment of syndicated lending. However, there has been significant interest in this topic at a national level. For example:
- in 2018 the Spanish national competition authority fined four banks €91 million for colluding to charge above-market prices for the interest rates of derivatives that were used as instruments for the hedging of the interest rate risk associated with project finance syndicated loans;
- in 2016 the UK Financial Conduct Authority (the "FCA") uncovered evidence suggesting potential competition law infringements by firms engaged in syndicated lending, 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;
- 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; and
- the Loan Market Association (the "LMA") 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).
Next steps and implications for financial institutions
The Report will be of significant interest to the industry. In particular, the Commission and National Competition Authorities are expected to closely monitor the markets and potential competition issues identified in the Report. This may result in the launch of a formal sector enquiry and/or stand-alone competition investigations/enforcement action against the undertakings concerned.
It 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 origination and syndication activities, and that such programmes are implemented effectively.
Ashurst has advised numerous clients on competition investigations and competition law compliance in relation to syndicated lending.
