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Syndicated activity: Australian competition law primer
Author:
Australia | Publication | March 2022
Syndicated lending is a well-established and critical way for banks to share risk in financing large or risky projects. Similarly, it is common for more than one underwriter to be appointed in equity or debt sell-downs, so as to maximise channels to market.
However, these activities can also involve otherwise competing institutions corresponding about the terms upon which they will participate in the activity, sometimes with the potential to reduce competition between them.
On the heels of the high profile criminal cartel case, launched but now dropped, against three major financial institutions and senior individuals, the Australian financial services sector has been grappling with the boundaries of permissible conduct under competition law.
We have considered the novel aspects of the Australian competition law, the appetite of the ACCC, and how these sit against the high watermark of global competition law compliance principles in jurisdictions such as Europe and the USA. Below is a primer on the key points to note.
Australian context
| Australian competition law prohibitions | ||
| Cartels | Anti-competitive conduct | |
| Contracts, arrangements or understandings between competitors | Contracts, arrangements, understandings or concerted practices | |
|
|
With the purpose or effect of substantially lessening competition – e.g. price signalling or sharing sensitive information about proposed bid or tender responses |
Global best practice
Competition law risks can arise at various stages of syndication and underwriting processes. Whilst the scope of the law and available defences vary, the following themes are common to many competition law frameworks around the world.
| Risk assessment | |
| Before selection of the syndicate or award of underwriting agreement | At this stage, any exchange of competitively sensitive information (e.g. future pricing or elements of pricing, margins, returns or volumes, or plans regarding participation in opportunities) or coordination amongst banks that are seeking a mandate, is high risk. Logically, this is because those exchanges can impact the competitive outcome of the bidding process, as it has the potential to remove uncertainty between competitors. |
| After syndicate selection | Post-mandate, coordination necessary for the administration of the facility, including agreeing the loan documentation and syndication strategy, is permissible. |
| Loan sell-down | Where you will be competing to sell down risk in the secondary market, you should generally not discuss or otherwise coordinate with other underwriters, specific information such as when to sell, what proportion to sell, what price to sell at or who to sell to. |
| Post-underwriting agreement |
Consistent with the above, competition law risks can arise at the conclusion of an ECM/DCM underwriting engagement, particularly in the context of a bought deal where the underwriters have agreed to purchase securities not taken up by investors in the offering. If the underwriting agreement concludes with the initial offering and the underwriters revert to being competitors of one another, cartel risks will then exist. If the intention is that the coordination continues in relation to subsequent sale of any shortfall securities, then that would need to be carefully considered and structured in advance from the perspective of competition law, with rules varying country to country. |
| Refinancing & restructuring |
Anticipated refinancing Caution must be taken not to pre-empt or reduce the competitive process in the lead up to refinancing. Examples may include:
Default Discussions around restructuring in the event of actual or potential default are often performed collaboratively by syndicate members, potentially generating efficiencies but also increasing the risk of illegal coordination. |
| Syndicate as a forum for other anti-competitive behaviour | There is a cartel risk where two or more syndicate members agree pricing / terms, outside the context of negotiations in the sanctioned syndicate. Even if no understanding is reached, sharing competitively sensitive information in relation to other deals should not take place. |
Significant penalties can apply
What to do
 |
It is, nonetheless, understood and accepted that a level of coordination and information sharing can be necessary in order to carry out the orderly management of a syndicate or underwriting process. Often the structure and sequencing of activities will be key. Generally though, the following general principles should also be considered and apply: |
Act independently
All decisions regarding what opportunities to pursue and the price/terms upon which they are pursued are to be made unilaterally, and not in coordination with a competitor.
Timing is everything
Sharing competitively sensitive information might be acceptable at some stages but not others:
- Pre-mandate – unlikely to be acceptable – the borrower will be seeking to drive competition between banks for the mandate
- Post-mandate – information necessary for the administration of the activity that has been agreed – likely to be acceptable
- Subsequent activity – that is not sanctioned and necessary for the mandate – may not be acceptable
Consider the context
- Communications with competitors should happen only to the extent legitimately necessary. Consider whether information is “nice to know” or necessary. Could the same result be achieved with less sensitive information?
- Restrict disclosure to those individuals that “need to know” – consider information barriers (e.g. between originations and syndications teams).
- Have regard to limitations on disclosure under NDAs: they may sometimes exist to promote competitive tension.
- Whilst not determinative, the borrower’s understanding / consent to coordination is helpful.
The above is an outline of key potential competition law considerations. It is not an exhaustive explanation of the applicable laws or available exceptions. Please contact us if we can be of further assistance.
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