Tag: DG Competition

Syndicated Loans – Some Personal Observations

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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

ARISE EUFIS, SON OF CIFIUS

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Dr. Alan Riley and Oliver Bretz

This article argues that EUFIS, the EU Foreign Investment Screening is modelled on CIFIUS, in that it is a political rather than an administrative process. Merging companies should take it into account if there is a risk of their long-stop date being extended beyond the autumn of 2020. Early engagement with DG Trade, especially in relation to remedies, will be an important step

Compared to CIFIUS on this side of the Atlantic, the adoption of the EU Foreign Investment Screening (EUFIS) has gone almost unnoticed. This may be due to the fact that it is seen as a distant threat, coming into force in late 2020. However, for deals that are currently being negotiated with long-stop dates into 2020 one may need to start looking at this issue quite seriously.

It should also be noted that the European Commission will have no formal decision-making powers. Instead, it will be the coordinating entity between the different foreign investment review systems of the Member States. That co-ordinating role will give it a significant influence over the process. That influence is underpinned by the Commission’s right to publish opinions of its view of the proposed transaction. Given also the Commission’s role as defender of the overall European interest, and its technical capacity it is also likely to become the focal point for the development of acceptable remedies. It is also clear from the experience of CFIUS in Washington that the investment review process will be far less administrative and technical and far more political, with all the uncertainties that this brings.

EUFIS will also for the first time put DG Trade on a par with DG Competition in merger cases, including in relation to remedies. Under the EU Merger Regulation, Member States may take “appropriate measures” to protect public security, the plurality of the media, and prudential rules. Any other public interests must be approved by the European Commission on a case-by-case basis.It will need to be seen how the review period will fit with the timelines of the EU Merger Regulation and national Takeover codes. DG Trade will have to evolve specific procedures for pre-notification and the negotiation of potential remedies.

On 14 February 2019 Trade Commissioner Cecilia Malmström said: “I’m very pleased that the European Parliament has given its backing to this initiative. Foreign investment is essential to the health of the European economy. At the same time, it is clear that we have to address the concerns about the security risk posed by certain investments in critical assets, technologies and infrastructure. Member States and the Commission will have a much better overview of foreign investments in the European Union and, for the first time, will have the possibility to collectively address potential risks to their security and public order.” (emphasis added)

In summary, EUFIS creates a cooperation mechanism where Member States and the Commission will be able to exchange information and raise concerns related to specific investments. The Commission will be able to issue opinions when an investment threatens the security or public order of more than one Member State, or when an investment could undermine an EU project or programme of interest to the whole EU. There are also provisions for cooperation on investment screening, including the sharing experience, best practices and information on issues of common concerns. EUFIS also sets out some minimum requirements for Member States who wish to maintain or adopt a screening mechanism at national level, whilst leaving the ultimate decision to Member States.

The EUFIS process is intended to take around 35 working days and contains the following steps: (i) the Member State where the investment takes place has to provide information on the investment and upon request has to notify cases which undergo national screening (ii) other Member States can then request additional information and provide comments (iii) the European Commission can request additional information and issue opinions (summarising its views and the comments from other Member States).

The Regulation also lists several EU funded projects and programmes which may be relevant for security and public order, and which will deserve a particular attention from the Commission. That list includes for instance Galileo, Horizon 2020, Trans-European Networks and the European Defence Industrial Development Programme. The list will be updated as necessary.

The Regulation sets an indicative list of factors to help Member States and the Commission determine whether an investment is likely to affect security or public order. That list includes the effects of the investment on critical infrastructure, critical technologies, the supply of critical inputs, such as energy or raw materials, access to sensitive information or the ability to control information, the freedom and pluralism of the media.

Member States and the Commission may also consider whether the investor is controlled by the government of a third country, whether the investor has previously been involved in activities affecting security or public order, or whether there are serious risks that the investor could engage in criminal or illegal activities.

The Regulation does not require Member States to introduce investment screening mechanisms. Member States may maintain their existing screening mechanisms, adopt new ones or remain without such national mechanisms.

Only 14 EU Member States currently have national investment screening mechanisms. Several are in the course of reforming existing schemes or of adopting new ones. The precedent from the adoption of the EU Merger Regulation in September 1990, was that almost all Member States rapidly adopted their own national merger regime. As all Member States would want to be able to credibly influence other states investment decisions and the Commission process, it is likely in the run up to the coming into force of EUFIS those states without an investment regime will create one. This in turn could create a further hazard for smaller deals affecting only a national market, where clearance will be required in almost all Member States by the merger and the foreign investment regulator.

The Regulation does provide for some key requirements for national screening mechanisms including transparency of rules and procedures, non-discrimination among foreign investors, confidentiality of information exchanged, the possibility of recourse against screening decisions and measures to identify and prevent circumvention by foreign investors. Member States with current screening procedures include Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Spain and the United Kingdom (until such time as it leaves the European Union and becomes a foreign investor under EUFIS).

From the CFIUS experience it can be assumed that Member States will have to evolve sophisticated national review systems that are able to make complicated assessments on very fast-moving technologies in a very short timeframe. That is not an easy endeavour, it can be expected that the Commission will increasingly take some of the burden. That raises the question whether DG Trade is itself equipped to make these assessments and whether it needs additional staff and expertise.

Where EUFIS could make a significant difference is in the area of remedies. Where a merger triggers multiple national reviews, the Commission will almost inevitably become the coordinator on remedies. Experience suggests that the Commission will need to evolve remedies that can deal with these issues through measures such as (i) appropriate black-boxes and information barriers (ii) independent board directors with national security clearance (iii) appropriate national oversight. How these factors will be used is up for grabs in a process that is likely to be intensely political. However, as there is an obligation not to discriminate between investors, a body of precedent is likely to start evolving, perhaps even through the adoption of guidelines and remedies templates – in exactly the same way as has happened under the EU Merger Regulation.

Despite the fact that the decisions will ultimately be taken at national level, the mere existence of EUFIS will give the Commission a degree of oversight and power in the process, which should not be underestimated.