A report examining competition within the European syndicated loan market has been published, following a call by the European Commission for an examination of the sector. The report was prepared at the request of the Commission by consultancy firm Europe Economics with input from boutique competition law firm Euclid Law.
The report assesses the EU loan syndication market in terms of its effectiveness and functioning and identifies potential competition concerns. The report focuses primarily on three key finance segments - leveraged buy-outs, project finance and infrastructure finance - in six Member States: France, Germany, the Netherlands, Poland, Spain and the U.K. It also considers the impact of certain key pieces of European legislation governing the syndicated loan market.
The report examines a broad range of so-called “competition problems”, predominately through the lens of how to create optimum conditions for syndicated loans. Several market imperfections are identified in the report as “sub-optimal market outcomes”, which do not, however, necessarily lead to a breach of Competition law. For example, the report finds that appointing a lead bookrunner as a single lead bank to lead a syndication process could restrict the number of eligible bookrunners for future transactions, as the pool of banks that are able to perform this role would get smaller. However, such conduct does not amount to a Competition law infringement. The report also discusses non-competition-related inefficiencies in the markets such as KYC rules and settlement processes.
The report identifies potential Competition law concerns in the following broad categories: (i) exchange of sensitive information; (ii) collusion between lenders; and (iii) abuse of dominance. The key risks which could lead to Competition law breaches are as follows:
- Coordination to manipulate the syndication process: without appropriate safeguards, disclosure of strategic information between actual or potential competitors may facilitate collusive coordination during the competitive bidding process;
- Pre-Mandate market soundings: where pre-mandate market soundings cross the boundary from generic soundings to deal-specific soundings, banks may exchange information that influences their individual responses to specific requests for proposals, which may reduce competitive pressure in the bid process. One shortcoming of the report is that it does not clarify the difference between what is "generic" or "deal-specific", but it does flag the need for transparency through obtaining borrower consent before any deal-specific soundings are carried out;
- Abuse of dominance: collective abuse of market power held by lenders in the event of default or refinancing which may lead to inflating the loan price and terms and bundling additional securities to the loan.
- The report goes on to identify certain critical safeguards which ensure competition is preserved within the syndicated loan market. These include providing adequate duty of care training to staff, establishing protocols for banks around the exchange of deal-related information and limiting the sale of ancillary services by banks which are often bundled in with the underlying loan service.
Regulatory and other issues
The report also includes a review of the impact on competition of certain EU regulations on the syndicated loan market, including the Capital Requirements Directive and Regulation, the Alternative Investment Fund Managers Directive and the revised Markets in Financial Instruments package.
CRD IV imposes obligations on financial institutions to enhance the quality and quantity of capital reserves. The report finds the increased cost of funding long-term loans (e.g., corporate loans and project and infrastructure finance) as a result of CRD IV's capital requirements could open the market to non-bank institutions supplying such products. Conversely, liquidity requirements have the potential to reduce the profitability and therefore availability of committed facilities, given the requirements for banks to back such facilities with liquid assets.
AIFMD ensures alternative investment funds are managed, administered and marketed appropriately. The report finds that obligations arising under AIFMD may lead to a reduced appetite for syndicated loan products given their longer duration and reduced liquidity, which in turn leads to enhanced due diligence requirements. There may, however, be an improvement in streamlining of market practices surrounding the execution of such loans in a bid to ensure that settlement times do not delay ability to invest in other assets.
MiFID II regulates firms and trading venues involved in the provision and trading of financial instruments. Although syndicated loans are not financial instruments for the purposes of MiFID II, and therefore not directly affected by its rules, certain structured finance loan-related products (such as CLOs) will be affected by MiFID II's transparency and best execution regimes.
The European Commission recently introduced a package of measures to address non-performing loans in the EU. These include amendments to CRR which introduce a statutory prudential backstop requiring banks to have minimum loan loss coverage for newly originated loans.
Given the relatively recent introduction of many of the above regulatory requirements, the full impact of these changes on the syndicated loan market remains to be seen.
The FCA recently and separately considered syndicated loan markets as part of its market study into investment and corporate banking. It did not flag any specific competition concerns, although it noted that some practices (in particular for smaller clients) could have a negative impact on competition. The FCA also found greater access to investors in the syndicated lending arena was beneficial for borrowers.
The report also considers competition enforcement actions in the jurisdictions analysed. In the U.K. wholesale arena, the report considered Dahabshiil Transfer Services Ltd v Barclays Bank Plc and Harada Ltd and another v Barclays Bank Plc, in which the court granted an interim injunction preventing Barclays from withdrawing its banking services. In financial services, the report considered the FCA's 2017 statement of objections to four asset management firms which it alleged had broken competition laws by sharing information on the price they intended to pay in respect of IPOs and placings.
View the report.