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.
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.
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:
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:
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.
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