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In this article we will look at the market sounding/book building stage, in particular competition law issues that can arise.
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
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:
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:
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:
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.
15 May 2019
by Paul Gair