Cooperation between competitors is inherently risky from a competition law angle, although the risk level depends on the nature and the context of cooperation. Loan syndication is one such area of activity where multiple lenders, such as banks and institutional investors, join hands together to provide a borrower with the required capital for a variety of reasons, such as funding for mergers, acquisitions, buyouts, infrastructure investments and other capital projects.
Syndicated loans mostly occur either because a borrower requires an amount too large for a single lender to provide or the required loan is beyond the scope of a lender’s risk exposure levels or both. Loan syndication is a prudent method through which the lenders not only meet the borrower’s requirement but also manage the risks associated with such loans, by limiting it to their respective share of the loan interest. Usually, there is only one loan agreement for the entire syndicate having similar terms and conditions, documentation etc. In most cases, a lead financial institution – called the syndicate agent – is often responsible for the initial transaction, loan monitoring, repayments, compliances and overall reporting on behalf of all the lending parties. Often, specialists or third parties are additionally appointed by the syndicate members to assist them with various aspects of reporting and monitoring throughout various points of the loan syndication or repayment process. Since reporting and coordination requirement for completion and maintenance of the loan is vast, loan syndicates often require high fees to be paid by the borrowers.
While syndicated loan has a very legitimate and pro-competitive purpose, as it allows borrowers to obtain credit where no individual institution would be willing or able to carry the risk alone, the process of syndication is not without competition risk. Coordination, information exchanges and informal agreements amongst the lenders, during the process of loan syndication may result in reducing market uncertainty and restricting competition between them. As the lenders are likely to be competitors in the wider market, receipt of competitively sensitive information has the potential to have an impact on their competitive behaviour in the wider market. Although competition law is typically concerned with information exchanges on pricing levels, the likely pricing levels can be easily inferred from information on bank’s cost of funds. Therefore, information exchanges on costs may be treated as tantamount to information exchanges on prices, which is a serious competition law concern. Sharing of commercially sensitive information (such as fees, margins, credit terms, lender cost data etc.) can lead to fixation or standardization of pricing (such as the level of interest, fees, discounts etc. or other economic terms like margins, credit terms etc). It could also result in sharing of markets/customers or allocation of lending opportunities to particular financial institutions / consortia, rigging of bids and fixation/limiting capacity, as well as anticompetitive conduct in other areas where the financial institutions compete.
Firstly, at the loan origination stage, i.e., before a lending group is formed, and then at the loan syndication stage, i.e. when selling the loan into the secondary market and, finally, after the mandate has been signed, for example, in relation to potential events of default. Each of these stages offer different levels of competition law risk.
This is the stage with most potential risk, as banks and institutional investors may exchange information to determine the terms and conditions of the agreement with the borrower. When a request for proposal is issued, each bank/lender must compete individually with each other and should avoid any communication of confidential information. However, if conversations are necessary for some reason, such as to test liquidity, the borrower should be informed in advance and its consent obtained. Further, conversations between lenders should not take place unless appropriate safeguards have been put in place. For example, information may be exchanged only within “clean teams” subject to nondisclosure agreements. It is important to note herein that lead arrangers at this stage may also typically engage in “market soundings” to test investor appetite for subsequent loan syndication in relation to the secondary market, whilst they are simultaneously negotiating with the borrower in the primary market. As such, there is a need to avoid exchange of competitively sensitive information between competitors during the market sounding process, as it may infringe competition law.
At the loan syndication stage (i.e., after the lending group has been formed), the lead arrangers are generally mandated to enter into discussions with other lenders. However, discussions between banks and investors must be within the scope of the borrower’s instructions and must focus on the deal at hand. Bi-lateral discussions between lenders that fall outside the terms and scope of the loan agreement, may result in limited choice for borrowers, restrict competition (including pricing) in the secondary market, which may infringe competition law. Lenders must refrain from discussing individual lender decisions, such as holdback levels. Lender communications should be maintained in a bilateral fashion between the lender and the arranger or borrower, and not amongst all the lenders. The golden rule is that the syndicate must exist for the purpose of facilitating the extension of credit to the borrower, but for all other purposes lenders must remain competitive.
Loan repayment stage: After the mandate has been signed, competition law issues may arise, for example, in relation to how to deal with a potential event of default or whether to exercise flex terms. However, the competition law risk at this stage is much less.
In view of the above, it is important for the banks to avoid exchange of competitively sensitive information between competing origination desks during the bidding phase, and to remain alert regarding their conduct during general market soundings, interactions regarding the flexing of terms, refinancing/distressed arrangements, etc. Further, lenders should keep a careful record of prior consent of the borrower to any proposed contact with competitors and they must only act within the terms of the consent given.
It may be pertinent to state herein that there is a reinvigorated interest in the regulatory scrutiny of the financial services and insurance sectors by competition authorities, particularly in Europe. The possibility that the Competition Commission of India may follow suit should not be wished aside, as the nature of competition concerns in relation to loan syndication is similar across different jurisdictions and so is the competition law.
The European and US investigations into LIBOR (London Interbank Offered Rate), foreign currency rates, and credit derivatives, have evidenced that contacts between financial institutions are already subject to heightened antitrust scrutiny. More recently, the European Commission fined three banks €485 million relating to euro interest rate derivatives. The Commission found that the banks exchanged confidential and sensitive information about their Euro Interbank Offered Rate (EURIBOR) positions and pricing strategies.
Even earlier, in its submission to the OECD in 2010, the European Union raised the concern that banks could coordinate on prices or share markets, “possibly in the segments related to very large transactions where a small number of banks dominate”, “bid together for an investment banking mandate and reduce significantly the alternatives for the client”, or “refrain from bidding too aggressively for a book runner
Mandate in the syndicate on the promise of being later selected as a member of the syndicate”. In line with its view regarding the functioning of the institutions operating in the financial markets, the European Commission issued a tender offer in April 2017 to have a systematic analysis of the competition implications of loan syndication in six EU Member States (France, Germany, the Netherlands, Poland, Spain and the UK). The European Commission, in its Directorate- General for Competition’s 2017 Management Plan, has indicated that the loan syndication area “exhibits close cooperation between market participants in opaque or in transparent settings … which are particularly vulnerable to anticompetitive conduct”. The aforesaid systematic analysis / study is very significant, as such studies are often a prelude to a sector inquiry or formal enforcement action.
The stakeholders must bear in mind that breach of competition rules can result in very significant consequences for any 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.
Accordingly, banks and financial institutions involved in syndicated lending and/or other multi-bank deals, must take note of the following:
In other words, banks and other institutions involved in the syndication process must ensure that their house is in order, meaning that their practices must be competition law compliant.
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