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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Increased clarity or confusion?
Global | Publication | May 2019
Syndicated lending is a well-established and critical way of banks sharing risk in financing larger or riskier projects which a single lender is unable or unwilling to assume. Such arrangements are therefore clearly in the interest of borrowers and increase market liquidity. However, syndicates also involve otherwise competing banks talking to each other about the terms of the financing in a manner which could reduce competition between them – which is where competition law concerns in this area have arisen. While borrowers and lenders alike want a simple and clear set of rules to follow, this has to date not been forthcoming from competition agencies, with widespread concern following a previous LMA Notice in 2014 suggesting that those involved in certain activity relating to syndicated loans could be engaged in criminal conduct.
In this context, the focus has switched to the findings of a recent report prepared for the European Commission on competition risks in syndicated loans. The Commission’s study seeks to understand whether the market is working well, having already identified that syndicated loans involve close cooperation between market participants in opaque settings that are particularly vulnerable to anti-competitive conduct. Key points to note are
At about €720bn in EU lending each year, syndicated loans are a significant source of finance and have benefits for lenders as well as borrowers – allowing several lenders to share credit risk and provide loans to a borrower in a single loan facility agreement. But care is needed given competition law generally prohibits competitors sharing competitively sensitive information (e.g. current and future price information, credit terms and lender cost data) or otherwise entering into arrangements to coordinate prices, share markets/customers, collude on bidding processes or fix/limit capacity.
The risk differs depending on the stage of the syndicated lending – e.g. (i) before the lending group is formed, each bank should compete individually and not exchange competitively sensitive information (ii) after the group is formed, banks may work together and exchange certain communications subject to the borrower’s consent and scope of instructions and (iii) after the mandate is signed, there may be competition issues around how to deal with a potential event of default.
The consequences of infringing competition law can be severe, including significant fines and large damages claims, meaning market participants (including those acting outside the EU) should familiarize themselves with the risks and take steps to mitigate them, not least the following critical safeguards the report identifies
The report is the first in-depth competition review of the EU syndicated lending market, although certain national authorities have previously carried out work in this area. At 300+ pages and based on interviews with 37 lenders and 100 borrowers/sponsors, as well as debt advisers, credit rating agencies and other participants, the report focuses on three market segments – leveraged buyouts (LBOs), project finance and infrastructure finance in six countries (France, Germany, the Netherlands, Poland, Spain and the UK). While specific evidence of competition infringements or inherently anti-competitive market features are not identified, it highlights the following features that may cumulatively increase competition risk
The report assesses in some detail the potential for these features to facilitate collusion among lenders or otherwise result in worse outcomes for borrowers by reference to six stages of the syndication process as follows
The report helpfully identifies and assesses the competition risks related to syndicated lending. With the possibility of future enforcement action or other further scrutiny by the Commission or even national competition authorities to come, lenders should protect themselves by ensuring that their employees receive regular competition compliance training and that internal safeguards (e.g. information barriers, non-disclosure agreements and protocols) are effectively implemented to prevent inappropriate exchanges of information and to limit the cross-sale of unrelated services.
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Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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