Competition Law and Syndicated Loans: Identifying the Regulatory Risks 14 Competition Law Journal 2015

14 Competititon L.J. 231 (2015)
Competition Law and Syndicated Loans: Identifying the Regulatory Risks

handle is hein.journals/comptnlj14 and id is 247 raw text is:

231

Competition law and syndicated loans:

identifying the regulatory risks

Oliver Bretz'

Introduction
The origination of deals and any related syndication process has a perfectly legitimate and
pro-competitive purpose. It serves the provision of liquidity to borrowers where no individual
institution would be willing or able to carry the risk alone. The ability of banks to carry out
both loan origination and loan syndication in a competition law-compliant way is essential
for the effective functioning of the market. Without syndications the market could not
provide the required liquidity.

However, the process of underwriting and syndication is not without competition issues, and
in May 2014 the Loan Market Association (LMA) published a notice on the application of
competition law to syndicated loans (the LMA Notice).2 The LMA Notice emphasised the
recent changes to the UK competition law regime, and the need for banks involved in loan
arrangements to recognise the need for caution when competing with each other on a
prospective multi-bank deal. In particular the LMA Notice emphasises the need for caution in
the following areas:
* general market soundings;
* conduct during the bidding phase;
* exchanging competitively sensitive information;
* interaction regarding 'flexing' of terms;
* conduct regarding refinancing/distressed arrangements.

However, the LMA Notice provides little guidance on how banks should conduct themselves
in these areas to avoid committing an infringement of competition law. Furthermore, an
overly cautious application of competition compliance rules could have an unintended
negative impact on liquidity. This article attempts to shed some light on where the risks to
competition law are most prevalent in the loan process and how these potential infringements
should be assessed from a competition law perspective.

Background to the loan origination and syndication process
There are generally two different types of loan transaction: (i) fully underwritten deals and
(ii) best endeavours transactions. In a fully underwritten deal, banks will take the transaction
risk onto their balance sheets at a certain 'hold level' for each bank, thereby effectively
guaranteeing the amount to the borrower (with the possibility of a later syndication). In a
best endeavours scenario the banks will seek to do a back-to-back syndication in order to
'lay off' the risk in the market, ie transfer the credit risk generally by selling the loan on to
other investors. There may also be a provision in the best endeavours loan agreement that

1 Oliver Bretz is Director and Founder of Euclid Law. The author wishes to thank Marie Leppard for her assistance with
this article.
2 Available to download from www.1ma.eu.com.

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