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Market disruption clauses in syndicated loans
Practical Law UK Legal Update 2-386-0675 (Approx. 2 pages)
Market disruption clauses in syndicated loans
by Ian Giles, Norton Rose LLP
| Published on 08 May 2009 |
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Market disruption clauses may result in the exchange of commercially sensitive information between lenders, potentially leading to co-ordinated and anti-competitive behaviour. This article explains what actions syndicate lenders can take to minimise this risk.
Nature of concerns
The operation of a market disruption clause gives rise to competition law concerns as it could result in the exchange of commercially sensitive information between lenders, potentially leading to co-ordinated behaviour in the market in a way which would be considered anti-competitive.
The problem is most likely to arise if, in a market disruption notice, a lender provides commercially sensitive information (such as cost of funds) to the facility agent who disseminates this information to other syndicate lenders.
Although competition law is typically concerned with the exchange of pricing information, a bank's cost of funds may be treated as tantamount to pricing information if it allows banks to infer competitors' likely pricing levels. These concerns are accentuated in the current climate where lenders may simultaneously trigger market disruption clauses in a number of loan agreements, making cost of funds information particularly sensitive.
Precautions to minimise competition risk
The following steps help minimise the risk of competition law concerns arising in loan renegotiations where a market disruption clause has been triggered:
- All commercially sensitive communications within the syndicate should be carried out via the facility agent. There must be no direct disclosure or communication of sensitive information between syndicate lenders.
- The facility agent should avoid revealing commercially sensitive information relating to one lender to other members of the syndicate. It should only pass on an outline of the market disruption event notice, keeping the commercially sensitive information to itself.
- The agent should be cautious about taking a pro-active approach to negotiating a substitute basis for the loan as this could effectively set standard substitute terms across the market at a higher level than would otherwise have been the case. To avoid this blanket effect it may be preferable to wait for the borrower to request negotiations.
- Information barriers must exist within the facility agent and the borrower to ensure that information relating to other lenders' cost of funds, received in the role of agent/borrower, does not flow to the lending arms of these institutions where they might influence future lending practice.