23 Feb 2017

Antitrust spotlight on syndicated loans - 2017

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The European Commission Directorate-General for Competition (DG COMP) published its Management Plan on 15 February 2017 setting out DG COMP's enforcement priorities and strategic objectives for 2017.1 It has made clear that one of its objectives will be to closely look at competition issues relating to syndicated loans in the EU in 2017, which is likely to result in the launch of a 'study' by the European Commission (Commission) to determine whether the syndicated loans market is functioning competitively.

The Commission commented in its Management Plan 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. Work will focus on obtaining relevant information on market structure, dynamics between market participants and potential competition issues."

Target financial institutions can expect onerous information requests from the European Commission during a market study – requests that will undoubtedly be obligatory. You should also be aware that once the Commission opens such studies (or more formal sector inquiries), these are more often than not followed by formal investigations and enforcement action against entities suspected of anti-competitive conduct.

This reinvigorated interest in syndicated loan arrangements follows previous high profile antitrust investigations into LIBOR/EURIBOR and foreign exchange trading, resulting in multi-billion Euro fines (and several criminal trials on both sides of the Atlantic by various authorities).

It also comes at a time when Commissioner Vestager has made it clear the European Commission has not finished with the financial sector - "our work in the financial sector is not done".2

It is therefore important that banks and other institutions involved in the syndication process ensure that their "house is in order" – in effect that their arrangements are competition law compliant and strengthen their competition compliance policies and training sooner rather than later.

What is the antitrust risk?

Competition law prohibits arrangements between competing syndicate members to fix prices, share markets/customers, rig bids, and fix/limit capacity. Above all, competition law prohibits the sharing of commercially sensitive information such as current and future price information (e.g. fees, margins, credit terms), lender cost data (as this can relate to pricing) and other confidential information.

Although the syndicated loan process can have a very legitimate and pro-competitive purpose by allowing borrowers to obtain credit where no individual institution would be willing or able to carry the risk alone, the process of underwriting and syndication is not without competition risk. The level of competition law risk depends on the stage of the transaction. For instance, before the banking group is formed by the borrower, each bank should be competing individually and should avoid any communication of confidential information. After the group is formed, banks are allowed to work together and exchange certain communications within the scope of the instructions of the borrower. After the mandate is signed, there may still be competition issues around how to deal with a potential event of default or whether to exercise flex terms, but there is less competition risk.

Breach of the competition rules can result in very significant consequences for any institution party to the syndication process (e.g. arrangers, agents, lenders, security trustees, syndication members etc.). This can include significant fines (up to 10% of group worldwide turnover), null and void agreements, third party damages actions and disruptive and onerous investigations for the institutions.

Individuals should also beware as they are not immune and can face criminal sanctions (e.g. fines, prison sentences). For instance, in the UK, were the Financial Conduct Authority (FCA) to investigate the sector, it could do so both as a market regulator and a "concurrent" competition enforcement agency working alongside the UK's Competition and Markets Authority and/or the Serious Fraud Office to enforce the UK's criminal cartel offence (which carries a maximum 5 year jail term for individuals). Directors can also be disqualified from their positions for up to 15 years in the UK.

It is important to note that a violation of the EU competition rules can take place by companies acting outside of the EU, where customers in the EU are affected.

Growing spotlight?

This is not the first time that regulators and other organisations have considered whether syndicated loan arrangements could give rise to concern, albeit, the syndicated loan market is yet to be investigated in the EU (and the UK).

  • The Loan Market Association (LMA) published a notice in May 2014 emphasising the need for banks involved in loan arrangements to exercise caution when competing with each other on a prospective multi-bank deal. The LMA Notice made clear that banks should take account of:

    • General market soundings
    • Conduct during the bidding phase to avoid any inappropriate contact between competing origination desks
    • Exchanging competitively sensitive information
    • Interaction regarding the establishment or flexing of terms
    • Conduct regarding refinancing / distressed arrangements.3
  • The UK's pre-2014 competition enforcement agency, the Office of Fair Trading (OFT) considered the syndications market more generally in its 2011 report Equity Underwriting and Associated Services and noted there was an increase in the numbers of banks involved in underwriting syndicates following the financial crisis and recession.4
  • The FCA, which has concurrent competition law powers as of 1 April 2015, ​cited the OFT's findings in its Wholesale Sector Competition Review 2014-2015, weighing up the pros and cons of syndicated activity more generally.5
  • In 2016, the FCA also took a strong interest in this area. The FCA uncovered potential infringements of the competition rules related to disclosures and / or exchanges of competitively sensitive information concerning the terms of lending. That resulted in "on notice" letters from the FCA to the firms involved. Those firms had to change their practices and strengthen their competition compliance policies and training.6

Guidance tips…

If you are involved in syndicated lending and/or other multi-bank deals, bear in mind the following:

  • Do determine your commercial strategy independently of any other participant in the syndication process.
  • Before entering into negotiations with other lenders, seek and record the consent of the borrower to contact competitors. Always make sure this paper trail exists.
  • Under no circumstances should a lender discuss pricing or future commercial strategies in relation to a particular borrower with other actual or potential competing lenders.
  • Ensure appropriate procedures are put in place so that a facility agent cannot pass on any commercially sensitive information to other areas of the bank where it might be used to formulate future strategy.
  • Train all staff involved in the syndication process to make sure they behave appropriately and in compliance with the competition rules. Make sure they can also spot potential breaches of the competition rules.

We can help

If you have any concerns relating to any syndicated lending ​which your organisation is involved in, we can help:

  • Provide practical guidance as to how you and your staff should behave, by helping you write your competition law compliance policy to providing training and guidance on what originators, distributors, agents, etc., are permitted to do and not do in their day to day operations.
  • Advise you if you have any concerns over past behaviour (including on immunity and leniency programs).
  • Advise you in a dawn raid scenario if the competition authorities call on you.
  • Respond to any information requests in the event the Commission does launch a study as well as help you understand the overall process of market studies.
1 See Management Plan 2017: DG Competition, page 11 / footnote 31  
2 See Statement by Commissioner Vestager on decision to fine Crédit Agricole, HSBC and JPMorgan Chase € 485 million for euro interest rate derivatives cartel dated 7 December 2016  
3 See LMA: Notice On The Application Of Competition Law To Syndicated Loan Arrangements, 30 May 2014.
4 See Equity Underwriting and Associated Services: An OFT Market Study, January 2011, OFT1303 
5 See FS15/2: Wholesale Sector Competition Review 2014-15, February 2015 
6 See FCA February 2017 newsletter: Hot topic: Competition law concerns involving syndicated lending firms.
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