Where are prospective lenders to a syndicated facility at risk of competition law infringements?

This is the first article in a series of six highlighting some of the key legal issues that can arise throughout the life of a syndicated loan facility.

In this article we will look at the market sounding/book building stage, in particular competition law issues that can arise.

Competition law issues during market sounding and book building

Overview

The European Commission recently published its study on competitive dynamics in the European syndicated loan market (the Study).  Overall the Study does not identify any significant issues likely to be investigated by the relevant authorities, which clearly will be welcome news to market participants.

Nonetheless, the Study does highlight certain market features and processes that are "more or less conducive to potential competition law problems".  These include (but are by no means limited to) the bidding process, during which the lead banking group is formed, given the communication which occurs between lead arranger, other lenders and the borrower.

In this article we will summarise the key safeguards recommended by the Study in relation to competitive bidding processes between (i) individual banks and (ii) ready-made consortia, as well as the direct appointment of a single/relationship bank.

The full Study, covering risks and safeguards in relation to other stages in the syndications process and the differences between the leveraged buy out and project finance/infrastructure sectors can be accessed here: http://ec.europa.eu/competition/publications/reports/kd0419330enn.pdf 

Bidding process – individual banks

The Study identifies the key competition risk in this context as relating to information sharing between actual and potential competitors which, even if unilateral, could still reduce market uncertainty.  In the extreme, where information exchange leads to a concerted practice between lenders, it may restrict competition by facilitating alignment of their competitive behaviour. 

The safeguards the Study recommends include:

• A degree of separation between the syndication and origination functions, to reduce the risk of information obtained by the syndication desk regarding other lenders' credit appetites making its way to the origination desk and facilitating co-ordinated bidding. In smaller institutions where the two functions may co-exist in the same team, at least the same individuals should not be involved in each process.
• Structuring the bidding process, to keep lenders separate for as long as possible and reduce the need or potential for information sharing.
  • This could be effected by not revealing the identity of other respondents to the RFP, and only bringing banks together for certain discussions of limited scope, or not at all until terms are finalised.
  • Although difficult to enforce in practice, the use of NDAs would at least help to define what type of information may or may not be appropriately exchanged, and signals the intention to protect the integrity of the bidding process.
  • Whilst these measures largely fall to the borrower/sponsor to initiate, how they go about this may vary with the borrower's sophistication and banks must of course observe their wider obligations in any event.

Bidding process – consortia

In this context, where a group of banks submit a joint bid at the borrower's request, there is a much lower risk of inter-bank communication causing competition law infringements, provided that the group operates within the scope of the borrower's instructions.

Nonetheless the Study again recommends various safeguards, including:

• Setting clear parameters for the consortium, to control the extent of co-operation needed to submit a joint bid. Any variation to the original parameters should be made with the borrower's consent and ideally recorded in writing.
• Separating elements of the bid process to further limit the extent of communication between members of the consortium, for example by requesting a joint bid on syndication strategy but separate bids on price, supported by appropriate NDAs.
• Compliance with the wider regulatory regime; for example where a borrower sets up a process which may lead to poor outcomes (e.g. limiting the competitive tension) there may be a regulatory obligation on the banks to notify the borrower that the process may not be in its best interests.

Bidding process – single/relationship bank

Where a borrower directly appoints one lender (or group) to act as arranger/co-ordinator, the entity appointed typically will be one the borrower has an existing relationship with.  This can have many benefits to the borrower, and the risks around information exchange which otherwise exist at the pre-bid stage are not present.

Other risks inherent in this scenario, however, may be mitigated by the following safeguards recommended in the Study:

• Reputational risk and the possibility of losing future business should prevent the arranger behaving anti-competitively, for example by seeking to exclude other lenders from joining the syndicate which may result in an unsuccessful syndication.
• A sophisticated borrower may be able to retain greater control over appointments to the banking group (or be less reliant on the arranger's advice or influence in this respect) and to monitor the arranger's interaction with other participants, mitigating the risk of the arranger excluding challengers or manipulating loan terms.
• Similarly, and subject to the size of the potential market, a sophisticated borrower which intends to monitor the arranger may also wish to retain the ability to replace the arranger in the case of underperformance.

Looking ahead

Whilst the Study found no particular instances of competition law infringements it provides in depth commentary on the areas most vulnerable to anti-competitive conduct in the bid process (as covered in this article) and beyond. 

The EC and relevant competition authorities (in the UK, the FCA and CMA have concurrent powers) will no doubt carefully consider the Study, potentially leading to a more detailed review and follow up action.  The FCA has already shown its teeth as a competition regulator, albeit in the asset management sector, having issued a decision in late February 2019 finding 3 firms had inappropriately shared information during an IPO, which of course followed a bidding procedure similar to that in the syndicated loan context.  

Market participants would be well advised to review their current practices in light of the Study and ensure business teams are aware and have understanding of the issues and how they can be safeguarded against.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.