Deborah Drury (Europe Economics) and Oliver Bretz (Euclid Law)
A lot has been written already about the European Commission study into Syndicated Loans, which Europe Economics and Euclid Law were commissioned to undertake by DG Competition. We thought it appropriate to share some short personal observations on the study and its impact on compliance policies with financial institutions. These views are intensely personal and are not attributable to anyone other than ourselves.
The most striking point was the absence of any available precedent to apply competition law to syndicated lending. Yes, there had been the case in Spain but that was effectively a straight case of unlawful horizontal coordination behind the back of the borrower. So there was no precedent at all anywhere in the EU that could provide any guidance. As a result, we had to go back to first principles and develop a legal framework with risk assessments but without taking a view whether something could nor could not infringe Art 101(1) or indeed be subject to exemption under 101(3). Those questions are very fact-specific and we were never going to conduct an actual investigation as part of the Study.
So where did we start? Ultimately the process was one of fact-finding using the basic legal framework that we had developed. This fact-finding was not based on any formal powers and we are very grateful for the cooperation we received on a voluntary basis from a large number of financial services organisations. We also adopted a phased approach to the different stages of origination and syndication in order to identify the relevant risk factors. Again, it should be stressed that we relied on voluntary cooperation in identifying those risks.
The picture that emerged was that markets are generally functioning well for borrowers and that compliance procedures are generally robust. This was particularly the case in the LBO sector where large financial institutions with sophisticated compliance approaches predominate. That market was also characterised by fragmentation, which is usually a sign of an absence of market power, although we did not have the ability to obtain hard data to assess market shares.
In relation to Project Finance and Infrastructure the conclusions on competition risks were less obvious. We identified that there was more of a risk that banks could have a degree of market power in relation to specific types projects. For example a wind-farm project in Eastern Europe might not attract a wealth of offers from international banks. That may be down to a lack of experience, appetite or indeed pricing, which we did not seek to opine on as part of the Study. However, it is striking that the market participants in Project Finance and Infrastructure are quite different from those in LBOs. Market power in itself is not a problem, of course, as long as no borrower-adverse actions are taken on the back of that market power. And in the absence of market power, some actions such as the bundling of ancillary services (without having a single agreed price), may be a regulatory issue, but it is hard to conceive that there could be an actual competition problem. This is clearly an area where the Commission and national financial regulators would wish to remain vigilant. Another area where market power could potentially exist is in relation to a refinancing situation, either just before or after an event of default. Although it is difficult to conceive of an abuse of dominance case in relation to a single borrower in a period of short-term distress, this should remain an area of concern to the Commission and national regulators – and banks should proceed with great caution. A clear benefit of the Study is the development of a usable compliance framework (in the absence of EU precedents), which will enable institutions of all sizes to identify risk factors in deals and take appropriate compliance action. Financial institutions are likely to review compliance procedures, as scrutiny of the sector will continue over the coming months and years.
A copy of the study can be found HERE