The European Commission has recently published a report prepared by Europe Economics on the impact of loan syndication on competition in EU markets (the “Report”). Although the Report doesn’t specifically point out upfront competition constrains, it offers insight on aspects that may trigger competition law problems and future enforcement procedures, at both European and national level.
The Report analyses loan syndication in six member states: UK, France, Germany, the Netherlands, Spain and Poland. Poland is used as a proxy for smaller Eastern-European countries where euro is not the currency borrowed in. Consequently, although not being specifically targeted by the Report, it appears that the findings regarding Poland are equally applicable to the Romanian market.
The Report covers three main lending segments, namely (i) leveraged buy-outs (“LBOs”), (ii) project finance (“PF”) and (iii) infrastructure finance (“INFR”). As regards market concentration, it appears that none of the three markets is a highly concentrated one, although the PF and INFR markets may contain areas where the offer is limited due to lack of specific knowledge. The Report also points out that Poland (and, thus, potentially, Romania) offers significantly less choices for borrowersin comparison with its western counterparts, with the problem worsening in the PF and INFR segments.
Moreover, the Report refers to evidence of a home bias, namely the top ranked lenders in each country tend to have national presence. As a recurring issue, it appears that the home bias is more of a problem in Poland (and may, correspondingly, be in Romania) due to the lower deal frequency and the use of a non-mainstream currency (non-euro / pounds).
The Report it specifically points out that smaller countries such asRomania, with fewer potential Mandated Lead Arrangers (“MLA”), where the borrowing is notin pounds or euro should be monitored more closely.This can raise theRomanian competition authority’s interest in launching localized market investigation regarding loan syndication or, even more so, a targeted investigation (if specific sensitive areas are discovered).
We have summarised below some of the main competition risk areas identified in the Report at various stages of the syndication process.
The use of market soundings by MLAs
When MLAs cross the line from generic to specific market soundings prior to the formation of the lending group, there is a risk that the sensitive information provided could lead to collusive effects on the market or concerted practices. If the client has a non-disclosure agreement in place, due care should be exercised with respect to its observance (lack of observance of the non-disclosuire rules could constitute additional evidence that there is a potential competition breach).
The Report mentions that obtaining prior client consent could be a safeguard, should the MLA wish to conduct deal-specific soundings.
Information exchange post-mandate
Generally, in the post-mandate stage, the terms are agreed bilaterally between the borrower and the lender, so the risk of lenders to discuss against the borrower is seen as relatively low.
However, in club deals, the lenders are brought together to discuss loan terms. In such cases, the Report concludes there is a potential risk of information exchange, especially if the borrower is less sophisticated (e.g. a public authority). In all cases, however, information exchanges will be analysed on a case-by-case basis, but the rule is that joint discussions between lenders should be limited to the loan documentation and syndication strategy.
More generally, the Report notes that the various interactions between lenders on transactions over time give rise to some risk that lenders become familiar with each other’s conduct and strategies, which may enable coordination on future transactions. However, the Report does not indicate direct evidence of this identified in practice.
Ancillary services bundling
Generally, the allocation of ancillary services is part of the initial agreement of loan terms or of a subsequent competitive process. However, certain MLAs (particularly in Spain) make the provision of specific ancillary services a condition of the loan. The Report regards such bundling as a risk, although the Spanish competition authority has not specifically considered this conduct as unlawful.
Allocation of ancillary services directly related to the loan to banks that are part of the initial agreements is more common in IF and INFR projects. From a competition law standpoint, this tendency could facilitate price collusion, particularly when it comes to smaller markets (such as Romania), where the choice of the borrower/sponsor is limited.
Provisions regarding ancillary services not directly related to the loan have been banned in the UK, as the regulator considers they have no client benefit. However, right of first refusaland right to matchclauses may still be employed in Romania, although, subject to an individual assessment, they may raise certain competition risks, as specifically pointed out by the Report.
Tacit reciprocity in general syndication
In general syndication, bookrunners deal directly with other participating lenders. Over time, this may tacitly give rise to expectations of reciprocity, which could lead to collusion.
To mitigate the potential area of risk, one may consider safeguards such as regular feedback from bookrunners, borrower-driven white lists and approval of final syndicate member allocation by borrower.
The Report strongly advises that, should the borrower face financial difficulties, a functionally different restructuring team should handle the case. Notwithstanding any efficiency gains that may arise from using the same team, there is a significant risk of coordination if the refinancing team is comprised only of initial syndicate members.
In addition to identifying features of the syndication process and relevant market which may be deemed problematic from a competition law standpoint as set out above, the Report refers to certain measures which can help mitigate these risks. These include observing the banks’ duty of care to clients, putting in place enforceable protocols to limit information exchange between the bank’s syndication and respectively, origination function and limiting cross-sale of services not directly related to the loan, emphasising again the importance of properly implemented compliance training on these issues.
The findings and recommendations of the Report should be carefully considered, as it may be expected that they will be used by the European Commission and national competition authorities (including the Romanian Competition Council), as a catalyst for more focused or detailed scrutiny through future investigations.
article written by Catalin Suliman and Roxana Rosca, Filip & Company