Loan Syndication and EU Competition Law

12/18/18

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The intricate syndicated loan market has recently triggered attention from competition authorities internationally. Recently, the Spanish competition authority fined €91 million a syndicate of four Spanish banks. The Directorate General for Competition (DG COMP) of the European Commission launched a study on the topic in April 2017 (COMP/2017/008 – EU loan syndication and its impact on competition in credit markets). In anticipation of the results of this study, which are expected by the end of 2018 or early 2019, we highlight some of the competition law risks that may cause greater concern.

Syndicated loans are a great source of debt financing for multinationals and a preferred source to finance large acquisitions or projects through short term debt. With the current record-low interest rates and the level of sophistication of many international banks and companies to quickly form lenders consortia, we see a continued trend in the use of this financial instrument. Thanks to loan syndication, a single borrower can have access to a group of co-lenders where one or several banks will play the role of agent, lead or arranger, by setting the terms, conditions and interest rates and inviting other banks to bid and participate in the consortium. Lenders also see this loan syndication as an attractive means to lower their risks and own exposure to a single borrower.

In other words, loan syndication presents benefits and opportunities compared to other debt mechanisms such as bonds or straight bank loans. Furthermore, loan syndication brings clear pro-competitive advantages such as access to large debt for instance. At the same time, this mechanism of syndication represents real competitive issues. Can the information sharing process and coordination prior to negotiations or in the pre-formation stage, generate risks of anticompetitive coordination between banks? Are there strategic bidding risks by potential syndicated members? How can ancillary products be separated from the loan syndication negotiations? How about loan renegotiations and the potential reduced leverage and opportunities linked to facing a consortium?

At least two economic studies[1]: have demonstrated that there is a strong correlation between market concentration and price setting. Indeed, empirical research backs the theory that prices go up in both high and low market concentrations. This is explained in the high market concentration scenario by the fact that potential deviation from the collusion price by one bidder will push all the others to end cooperation. This is known as the grim trigger in game theory. In the low market concentration scenario colluding firms will have more leverage over deviant bidders and will be able to more effectively punish them if they undercut the set (higher) price.

As said, DG COMP has indicated, in its 2017 Management Plan[2], that it is now scrutinizing loan syndication because it “exhibits close cooperation between market participants in opaque or in transparent settings”.

In our experience, companies – in this case banks – under such scrutiny from the European Commission under the guise of ‘studies’ or ‘inquiries’ better prepare their factual statements and a solid defense of their business practices because the European Commission swiftly follows with investigations and fines.

[1] See, in particular, J.W. Hatfield, R. Lowery, S.D. Kominers and J.M. Barry, Collusion in Markets with Syndication, Working Paper 18-009, Harvard Business School; J. Cai, F. Eidam, A. Saunders, S. Steffen, Loan Syndication Structures and Price Collusion, available at SSRN, 13 March 2018.

[2] Management Plan 2017 of DG COMPETITION, page 11, footnote 31.

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