February 21, 2017 - Many loan market participants might be surprised to discover that syndicated loans could raise antitrust and competition law issues, both at the syndication stage and during restructuring. Yet, recent regulatory scrutiny in Europe and litigation in the United States suggests that it would be wise to be very mindful of these concerns.
A paragraph contained in the European Commission’s recently published 2017 Competition Management Plan addresses the issue of competition head on. In its plan, the Directorate General (“DG”) Competition, whose mission is to make markets “function better for the benefit of consumers – both households and businesses – and the society as a whole, by protecting competition on the market and fostering a competition culture in the EU and worldwide”, noted that “DG Competition will possibly also engage in a study on potential competition issues in loan syndication.” In a related footnote the DG observed that “This area exhibits close cooperation between market participants in opaque or in transparent settings, such as over-the-counter (OTC) activities, which are particularly vulnerable to anticompetitive conduct. Work will focus on obtaining relevant information on market structure, dynamics between market participants and potential competition issues.”
In the United States, the antitrust issue was raised in the context of a restructuring. In a case called CompuCredit Holdings Corporation v. Akanthos Capital Management, LLC. CompuCredit, a provider of credit and other financial services, initiated a tender offer for up to $160 million of its bonds at a price purportedly at market. Seventy percent of the notes were held by 21 hedge funds and none of them tendered. CompuCredit filed suit, alleging that the hedge funds had engaged in an unlawful conspiracy to boycott the tender offer to inflate the tender price. In June, 2011, the district court granted the funds’ motion to dismiss and, on appeal, a panel of judges on the United States Court of Appeals for the 11th Circuit affirmed, holding that a violation of the Sherman Anti-Trust Act does not occur when creditors act collaboratively to collect preexisting debts. The 11th Circuit then granted CompuCredit’s petition for “rehearing en banc” (by the entire court), which alleged that the panel’s ruling results in an “implied exemption” to the Sherman Act, something forbidden by Supreme Court precedent. The LSTA filed an amicus brief arguing that were the 11th Circuit to adopt CompuCredit’s proposed rule, it would threaten to freeze all pre-bankruptcy coordination among creditors for existing debt (including both bonds and loans) forbidding “as per-se illegal a long-established, near universal creditor behavior that benefits not only creditors but also borrowers, businesses and the economy as a whole.” The ten judges from the 11th Circuit heard oral arguments in Atlanta on Wednesday and, to the great surprise of everyone, two days later issued a one-page decision affirming, without explanation and by an evenly divided court, the district court’s decision. The good news? The district court decision was correct in dismissing the issuer’s anti-trust argument. The bad news? (i) Five 11th Circuit judges would have reversed and sent the case back to the district court to consider the anti-trust issues; (ii) the well-reasoned decision of the original three-judge 11th Circuit panel is vacated and of no legal effect; and, (iii) parties are likely to continue raising collusion defenses in the future because the 11th Circuit did not take this opportunity to rule decisively.
The LSTA has been following these trends and, on May 5, 2016, presented a webinar, “Antitrust and Competition Law Issues Arising in Syndicated Lending: How to Navigate Potential Pitfalls” in which we were reminded by Rod Carlton and Tom Ensign, partners at Freshfields, that antitrust risk in the loan market is not theoretical. While both the US and UK regulators have recognized the procompetitive effects of syndication, syndications do carry antitrust risks. Coordination, informal agreements and information exchange may carry the risk of reducing market uncertainty and restricting competition. The golden rule is that the syndicate must exist for the purpose of facilitating the extension of credit to the borrower, but for all other purposes lenders must remain competitive. Looking at three stages – origination, formation of the syndicate, and after the syndicate is formed – some key considerations were highlighted. At the origination stage, lenders must compete when an RFP is issued and may coordinate only if the borrower consents. Even if the borrower consents, market sounding carries antitrust risk so if conversations are necessary to test liquidity, the borrower should be informed in advance. In forming the syndicate, lender communications should be maintained in a bilateral fashion between the lender and the arranger or borrower, not among other lenders. When participating in a syndicate, it is legitimate to share information necessary to carry out the syndication, but discussions must focus on the deal at hand and lenders should refrain from discussing individual lender decisions, such as holdback levels. Click here for the UK’s Financial Conduct Authority Interim Report mentioned in the webcast.