New Block Exemption for Joint Loan Agreements

August 7th 2018

Dear Colleagues and Friends,

On June 14, 2018, the Israel Antitrust Authority (the “IAA”) published the Antitrust Rules (Block Exemption for Joint Loans Arrangements) (Temporary Provision), 2018 (the “Joint Loans Block Exemption” or the “New Block Exemption”).

The Joint Loans Block Exemption deals with loans extended jointly by several financial institutions to a single business borrower. These loans, which include consortium arrangements and loan syndications, are especially common for large and complex projects. The organization and management of a joint loan is carried out by one or more loan organizers. The purpose of such arrangement is to enable several financial institutions to share risks and provide funding, which otherwise would not be possible at all, or only under inferior conditions. At the same time, from a local antitrust perspective, these arrangements are deemed a collaboration between competitors and they may raise competitive concerns. Therefore, such agreements were normally regarded as “restrictive arrangements” under the Antitrust Law, 1988.

Engaging in a restrictive arrangement is illegal unless it has been exempted by the Antitrust Commissioner or approved by the Antitrust Tribunal, or if it falls within the scope of a statutory or a block exemption.

The Joint Loans Block Exemption provides a formal and broader framework for the IAA’s previous policy of periodic public opinions which exempted consortium arrangements from restrictive arrangements enforcement under certain conditions.

Consortium Arrangements Exemption – Background

Joint loans are often beneficial for both the borrower and the lender. From the borrower’s perspective, this method allows the receipt of finance for large sums, which a single lender may not be able to provide or will only provide subject to inferior terms that reflect the increased risk embedded in these loans.

From the lenders’ perspective, a joint loan enables them to spread the credit risk efficiently among the different lenders, thereby reducing the lenders’ overall risk and allowing them to offer better credit terms to the borrower. In addition, joint loans allow the lenders to comply with the regulatory restrictions that apply on financial corporations with respect to their exposure to a single borrower.

In addition, joint loans allow both parties to reduce transaction costs, as they spare the need to execute several separate transactions between the borrower and different lenders.

These advantages are particularly relevant for small financial institutions, which usually lack the financial resources, the knowledge and the professional experience to manage large loans. Joining forces as part of a consortium of creditors allows them to diversify their credit portfolio and to benefit from the knowledge and resources of other lenders.

On the other hand, joint loans could diminish competition between financial institutions, since consortium members coordinate their proposal vis-à-vis the lender. The concern is that instead of receiving several competing bids, the lender will be forced to accept one joint bid.

The IAA acknowledged both the advantages and the concerns of joint loans. Over the past few years, the Antitrust Commissioner published several informal public opinions stating that the IAA will not take enforcement actions against lenders who form a creditors consortium, provided certain conditions are met (e.g. the borrower’s written consent has been obtained in advance; the borrower was able to negotiate the credit terms with each borrower separately; proper documentation of the consortium arrangement has been kept and reported to the IAA). These public opinions have been periodically renewed (although at some point the IAA excluded collaborations between Israel’s two largest banks).

The Joint Loans Block Exemption

On June 14, 2018, the IAA published the Joint Loans Block Exemption. The main change is that the New Block Exemption sets a formal regime for joint loan arrangements. In addition, the New Block Exemption sets a broader framework, as it also addresses the loan organizer and not only the consortium members.

The New Block Exemption applies to joint loan arrangements that meet certain requirements set forth in the block exemption. Like the Commissioner’s previous opinions, the New Block Exemption requires the lenders to obtain the borrower’s written consent for the joint loan in advance and to allow the borrower to negotiate the credit terms with the different lenders without the loan organizer’s involvement.

The Joint Loans Block Exemption defines a “loan organizer” as a lender which acts to set the loan terms and to create the consortium, and a “large lender” as a lender whose share in the credit for business market is higher than 20%. The New Block Exemption stipulates that a consortium shall not include more than one large lender and that at least one potential loan organizer will not be part of the consortium unless exceptional conditions are met. Similar to other block exemptions, the Joint Loans Block Exemption is inapplicable if (1) the purpose of the joint loan is to reduce or prevent competition, or if (2) the joint loan arrangement includes restrictions unnecessary for the implementation of the arrangement.

Since the Antitrust Law may apply to foreign lenders as well, it is important for foreign entities who intend to participate in joint loan arrangements in Israel to consider the antitrust aspects of such transaction.

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