The report (324-page / 4.3MB PDF), by Europe Economics and Euclid Law on behalf of the European Commission, investigated whether the syndicated loans market in six EU countries is working well and efficiently. The six countries were France, Germany, the Netherlands, Poland, Spain and the UK. The research focused on two segments of the syndicated lending market: loans supporting leveraged buy-outs (LBOs), and those financing project and infrastructure investment.
Competition law expert Alan Davis of Pinsent Masons, the law firm behind Out-Law.com, said: "This report signals an increased interest and likely scrutiny by competition authorities of the unlawful exchange of commercially sensitive information between market participants in the wholesale financial markets".
"The report follows on from the recent competition law enforcement action by the Financial Conduct Authority (FCA) against asset managers for sharing strategic information during an IPO and a placing in the UK. The FCA found, in that case, that the firms disclosed and/or accepted otherwise confidential bidding intentions, in the form of the price they were willing to pay and sometimes the volume they wished to acquire. This allowed one firm to know another's plans during the IPO or placing process when they should have been competing for shares," he said.
The European Commission tendered in 2017 for a systemic analysis of the loan syndication market in six EU member states, and its possible implications on competition in credit markets. Syndicated lending is a type of debt financing in which several lenders come together to share credit risk, allowing a borrower to access a large-scale loan in a single loan facility agreement. Syndicated loans are a significant source of capital in the EU, with about €720 billion raised across Europe in 2017, according to the report.
In its report, Europe Economics identified a number of aspects of the syndicated loan market in which competition concerns could potentially arise. In particular, it highlighted market soundings and the exchange of information between lenders; which it said was more of a risk in relation to infrastructure lending than LBOs. The report also identified the tying of loans to ancillary services, such as hedging, from lenders which are part of the syndicate as an area of potential concern, particularly when loans are refinanced.
The report identified important safeguards and market features which could be used to ensure competitive outcomes. These included training on the potential for conflicts of interest; ensuring competitive bidding processes; avoiding unwarranted information exchange; limiting the 'bundling' of ancillary services; and an emphasis on banks' duty of care to clients.
Europe Economics also identified areas of potential inefficiency in the loan syndication market not directly related to the competition policy risks: the slowness and expense of lenders' Know Your Customer (KYC) rules; and settlement processes more generally. Davis said that these could also be areas of future regulatory attention.