Syndicated loans: the European Commission publishes Europe economics report

On April 5, 2019, the European Commission (“EC”) published the report “EU loan syndication and its impact on competition in credit markets” commissioned to Europe Economics in August 2017. This report reinforces the focus of the EC and other competition authorities on potential anticompetitive practices in the syndicated lending market. The entities that are active in this market must take this report into account. (The report, in English, is available here.)

Syndicated loans are a significant source of financing in Europe, with about EUR 720 million raised in 2017. They are a source of financing offered by various lenders (usually banks) jointly as a syndicate. Among them, there are banks arranging the loan (MLAs or Mandated Lead Arrangers).

Cooperation between entities has significant benefits to the market as a whole, because it allows borrowers to obtain financing for large-scale projects or acquisitions that would otherwise be hard to finance (for example, through bilateral lending or corporate bonds). It also allows smaller lenders (i) to participate in large-scale lending; (ii) to share the credit risks of the transactions; and (iii) to obtain the expected return.

However, the EC is concerned about the progressive concentration of some syndicated lending market segments, which entails the risk that lenders enter into collusive agreements excluding potential lenders or unfairly moving against borrowers.

Europe Economics analyzes three key segments to examine these market dynamics in depth: leveraged buy-outs (“LBO”), project finance and infrastructure finance. The study focuses on six Member States where these lending practices are most present, namely France, Germany, the United Kingdom, the Netherlands, Poland and Spain.

The report concludes that the European syndicated lending market currently has little risk of encouraging anticompetitive practices, since there is an appropriate degree of dispersion and there is no evidence of information asymmetry between market participants.

The report still finds riskier practices that could lead to anticompetitive practices during the negotiation and provision of syndicated loans, the most remarkable being:

• Exchange of commercially sensitive informationbetween potential lenders during the origination function (pre-mandate or initial stage of the loan process). This risk increases if the lenders do not have an appropriate formal separation between the origination and syndication desks. The borrower’s consent is essential and, although it might not be decisive, it can provide prima facie evidence that there has not been an anticompetitive behavior.

• Coordination between MLAsto decide when to sell, what proportion to sell or at what price to sell the debt in the secondary market. However, the report provides that the risk is unlikely because the secondary market has sophisticated buyers.

• Restriction of the provision of ancillary services or products to the group of lenders. This factor becomes more important if contracting or purchasing these ancillary services and products is a pre-condition to complete the syndicated loan; there is a risk that the service conditions lead to sub-optimal economic outcomes for the borrower. Note that all the respondents that cited this practice were Spanish, but according to Spain’s CNMC precedent mentioned in the report, the practice was not anticompetitive per se.

The report also states certain mitigating factors or safeguards that could be implemented in the credit market to reduce the said risks:

• Trainingthe lenders’ staff to provide neutral advice to clients or borrowers trying to maximize their benefit. The lenders’ staff must obtain the prior, clear and express borrower consent to the proposals and to the scope of any mandate or negotiation.

• Regulating internal communication protocolsfor the lenders’ teams and staff managing the various stages (both for the origination and syndication functions) to prevent the leakage to competitors of sensitive information to be disclosed at a specific stage.

• Minimizing joint bidsfor syndicated loans and ancillary services and products unless it is strictly necessary.

The report also covers two areas that do not pose competition risks but on which the EU can focus in the next years to enhance the efficiency of the syndicated lending market by: (i) reducing restrictions on secondary market trading; and (ii) streamlining back office inefficiencies and internal policies applied by lenders to check borrowers’ financial soundness (KYC checks).

In sum, the report concludes that there is little risk of the European financial market encouraging anticompetitive practices, but its publication shows the EC’s interest in this sector. The report will probably prompt other competition authorities to focus on syndicated lending, particularly in markets with the riskier practices. Therefore, market participants should examine the risks and proposed safeguards to adapt their compliance systems.

Authors: Andrew Ward, María Lérida García and Beatriz García Quiroga.