The long awaited European Commission report into syndicated lending was published this morning.
This report (produced for the European Commission by Europe Economics) follows the EC’s investigations into potential competition law infringements in syndicated lending. This study was billed as “a systematic analysis of the loan syndication market, focusing on six EU member states, and its possible implications for competition policy”. The report considers both lender and borrower perspectives of the market’s competitive dynamics by reference to three key sectors: project finance, leveraged buyouts and infrastructure projects. The six sample member states considered in the preparation of this report are France, Germany, the Netherlands, Spain, Poland and the United Kingdom.
The good news is that in relation to loans supporting leveraged buy-outs this detailed report finds very little about current market practices to be of concern and is not suggesting that any further investigations need to be undertaken.
Broadly this is because potential areas of competition concern are mitigated by the fact that sponsors, borrowers and their advisers in the LBO market are sophisticated and run highly competitive processes to select MLAs and other lenders and to agree documentation terms. Lenders also appreciate the need to operate suitable separation between different teams within the same institution, and in particular between their syndication and origination teams. They also provide training to relevant members of staff concerning potential competition issues relating to different stages in the life cycle of a loan transaction, including any restructuring or consents procedures. In addition, sponsors, borrowers and MLAs retain close control over the distribution of transaction information to potential syndicate members and that process is transparent given the use of secure portals such as Debt Domain.
The Report identifies the following "critical safeguards to ensure competitive outcomes in the loan syndication process" within its conclusion. These paragraphs are taken verbatim from p237 of the Report:
- “Banks’ duty of care to
clients. There are two important safeguards here.
- Borrowers may source debt advice from the same lender that they wish to act as MLA (or, at least, consider acting [as] MLA). The critical safeguard here would be the adequate training and policies for the relevant staff at the potential MLAs. In particular, the training would need to cover topics such as the identification and management of conflicts of interest, and provide clarity as to duty of care to provide neutral advice to clients.
- MLAs should ensure that there are not alternative options that could be put to the borrower, including inviting other lenders not previously involved in the process to participate (subject to obtaining borrower or sponsor consent), or considering a re-structuring of the loan, before aligning loan pricing or terms upwards to a highest common denominator. If the particular lender asking for the higher price is needed for the purposes of the joint bid (e.g. as explicitly required by the borrower), the price should be set at an acceptable level. The borrower (and its advisors, if relevant) can promote a beneficial outcome through ensuring a competitive bidding process (i.e. approaching more banks), building latency into the process and maintaining bilateral negotiations with individual lenders (or lender consortia) through to mandate award.”
- “Avoidance of unwarranted information exchange. In loan origination banks (and any other market players capable of forming the lead banking group) may need to exchange pricing information for the potential syndication while remaining competitors in the origination. The key safeguard would be that there are enforceable (and enforced) protocols around how – and in what form – any deal relevant information obtained by the syndication function from other potential participants (who may also be competitors in the origination) may be transferred to the same bank’s origination function in order to avoid anticompetitive alignment of prices.”
- “Promotion of unbundled price competition. Ancillary services not directly related to the loan (e.g. future M&A advisory services) can be negotiated as part of the loan negotiation, with both “right of first refusal” and “right to match” clauses being used. In the absence of market power, such a bundled offering may be procompetitive but these have been found by the UK regulator as to have no client benefit - except when related to the replacement of bridging finance - and have been banned in the UK. It is advisable for syndicates to limit the cross-sale of ancillary services in order to avoid the risk of impairing competitive conditions in neighbouring markets to that of syndicated loans, and this should be kept outside the loan syndication process when these services are not directly linked to the loan."
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