European Commission indicates syndicated lending is ripe for review

In its recently published 2017 Management Plan the European Commission has highlighted that it “will possibly also engage in a study on potential competition issues of loan syndication” during the course of 2017. The Plan describes loan syndication as being “particularly vulnerable to anticompetitive conduct”.

Loan syndication can take a number of different forms. However, all involve lending institutions (who otherwise are competitors) working together as a group to finance a loan to a borrower. Competition law prohibits competitors from colluding, sharing markets or customers, fixing prices and/or sharing competitively sensitive information.

Competition issues in loan syndication

The Commission has not identified any specific issue or case behind its desire to review the market. However, the process of loan syndication involves competitor institutions working closely together, without the benefit of an exchange or platform to provide the process with transparency. It is therefore not difficult to see why the Commission might be interested to understand how this works.

There are a number of competition risks that can arise from the loan syndication process and the risk will vary depending on the stage of the syndication process. The most likely risks are:

• Illegal information exchange: As competitors work closely together on arranging a loan as a syndicate of lenders, some information is necessarily exchanged between institutions. Whilst much of this exchange is likely to be legitimate, it may also include information that is not always necessary for the syndication process and/or that is competitively sensitive eg members of a syndicate exchange information about previous loans or syndications that involved the same borrower.

This risk can be mitigated by imposing limits and guidelines on what can be exchanged, particularly once mandate letters have been agreed and signed - for instance, ensuring that contact between the lead bank and each syndicate member is bilateral, where possible.

• Collusion and price fixing: As well as exchanging competitively sensitive information, there is a risk that competing institutions in a syndicate can use the process to align their behaviour during the bidding phase between competing origination desks on bid terms and prices.

The Loan Market Association (LMA) has issued guidance on how institutions can enter into syndicates whilst complying with competition law. This guidance was prompted by changes made to the UK’s criminal cartel offence, which removed the requirement of dishonesty, but also added a number of statutory defences. The general guiding principle of the guidance is that, whenever practicable, lenders should seek the prior consent of the borrower to any proposed contact with competitors within the lending group. Once obtained, lenders should be careful to act only within the terms of this consent.

The pro-competitive effects of loan syndication

Although there are potential competition risks arising from loan syndication, its purpose is pro-competitive. This is because syndication allows banks to take on a portion of the total loan amount sought, where the overall amount would otherwise be too significant to be offered by one bank alone. Syndication is therefore especially important for smaller banks, which may not have access to the requisite pools of capital to meet larger loan requests on their own.

Syndication therefore also increases the accessibility of corporate finance for borrowers, as well as, in some cases, reducing a borrower’s overall cost. Indeed, the Financial Conduct Authority (FCA) noted in its Investment and Corporate Banking Market Study’s Final Report that the process benefited both borrowers and lenders, stating that “larger syndicates are not associated with higher fees, and they can broaden clients’ relationship options and provide a route for smaller banks to enter and expand”.

What can we expect next?

It is not yet clear when the Commission’s proposed study might commence. However, the Commission has identified the process of loan syndication as one that may require anti-trust scrutiny, and this may prompt national competition authorities and/or financial regulators across the EU to carry out their own reviews. Indeed, in the UK, the FCA confirmed (through its February 2017 newsletter) that it has sent several firms "on notice" letters of potential competition law infringements arising from disclosures or exchanges of competitively sensitive information that relate to the terms and conditions of syndicated lending.

If the Commission does indeed go ahead with its proposed study, it is therefore likely to probe the loan syndication process more closely than any competition authority has in the past. Syndicate lenders should note that the Commission’s information gathering powers and processes are extensive and, although what it appears to be proposing is some sort of study, it often takes enforcement action following market studies or reviews where it suspects there has been anti-competitive activity.

In the meantime, syndicate lenders should ensure that processes are competition law compliant as well as following common sense guidance and the approach espoused by the LMA. Adopting a "borrower first" approach means that the lender is less likely to commit a breach of competition law, even inadvertently.