Syndicated loans: are more antitrust headaches expected?

As regulators continue to increase the requirements for the resilience of banks following the financial crisis, the number of syndicated loans has increased. Such cooperation can potentially eliminate competitive pressure between banks, which means that competition authorities may initiate cartel investigations.

When it comes to commercial cooperation with competitors, banks and financial institutions may often find antitrust legislation to be a rather theoretical and far-fetched legal risk. Following the recent LIBOR and EURIBOR decisions regarding the manipulation of interbank benchmarks, however, such perceptions may have to be reconsidered. In late 2013, the European Commission fined eight international financial institutions more than a total of € 1.7 billion for participating in illegal cartels in the financial derivatives market covering the European Economic Area. Four of these institutions participated in a cartel relating to interest rate derivatives denominated in euros. Six of them participated in bilateral cartels relating to interest rate derivatives denominated in Japanese yen.

It is not only on interest rate derivatives that banks cooperate with each other in a manner that may be perceived by some as impeding competition and thereby having an adverse effect on the market and consumers. In other areas too, such as the provision of financial services for high-cost projects or high-risk lending through bank syndicates, competition concerns could be raised.

Over the past 30 years, syndicated loans have become an important source of financing for large firms, and, increasingly, even for mid-sized companies. A loan syndicate can be broadly defined as two or more financial institutions agreeing to jointly provide a credit facility to a borrower. Virtually any type of corporate and commercial loan or credit facility can be syndicated, including term loans, construction loans and export finance loans.

The increased use of syndicated loans could lead to heightened interest from competition authorities. It is therefore essential that banks and other financial institutions are prepared for such action, for example by amending their compliance programmes and taking competition law advice before entering into any syndicates or other cooperation on credits.

In assessing the competition law risks involved for a specific loan syndicate, the rationale behind the syndicate is essential. In short, the central issue that should initially be investigated in a given case is whether or not each individual member of a syndicate has the capability to provide the borrower with the entire credit by itself. If a member of a syndicate does not have such capability, for example if the amount is so vast that it jeopardises the bank’s future, it cannot be regarded as competing with other members of the syndicate in the same situation for the specific tender and no problems relating to competition law would be expected. There are two principal situations where such justification should be sought.

Firstly, there are situations in which banks are simply unable to provide large loans, for example to major construction projects, and therefore must cooperate in order to be able to provide an offer. In such cases, the cooperation between the syndicate members results in increased competitive pressure for the provision of the specific credit since the members would otherwise have been unable to compete for the financing services demanded. Under such circumstances, syndicated loans therefore enhance the competitive pressure and are therefore accepted.

Second, there are situations where there is a high risk of credit loss due, for example, to lending to financially vulnerable companies. For example, banks may hesitate to provide loans to companies with an unstable financial record due to the high risk exposure. From a competition law perspective, this may justify bank cooperation through syndicates if the risks involved in providing the loan were objectively too high for a single bank to assume. However, in these kinds of situations an individual bank will often find it difficult to establish that it could not commercially justify the provision of the loan by itself and that cooperation with one or several competitors through a bank syndicate would change the commercial expectations in that regard. In these situations, it may be even more advisable not only to consult competition law expertise but also to conduct a thorough analysis of the effects that the credit would have on the bank.

In conclusion, the use of syndicated loans may only be justified if the credit in question cannot, from a commercial perspective, be arranged in a more straightforward form such as a bilateral credit facility. When a company is in need of very large amounts of liquidity and/or lacks a stable financial record, smaller financial institutions or banks may simply not have the capacity on their own to satisfy the demand, resulting in fewer possible alternatives for the borrower and therefore less competition. In order for more lenders to compete for credit demand, this type of cooperation through syndicates may be the only viable option. It therefore follows that a further increase in the use of loan syndicates could potentially contribute to an intensification of competition in the market.