Syndicated loans / finance

If you need to borrow a large amount of money — a syndicated loan could be the answer.

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What is loan syndication?

A syndicated loan is a loan provided by a group of lenders (a syndicate) to a single borrower.

As the loan requests are often large, borrowers tend to be corporations, a large project or government entities.

The syndicated loan facility offered — normally includes a fixed sum or a line of credit. A combination of the two is also common.

A Syndicated loan is also referred to as loan syndication, syndicated finance and a syndicated bank facility. It is a key part of project finance.

Syndicated loans — considerations

An individual lender may be unable or unwilling to finance a single large loan request, but with the help of other lenders — a loan facility can be arranged.

Lenders may include big financial institutions like banks, or institutional investors like insurance companies, mutual funds, hedge funds and pension funds. These lenders have the option of selling their interests, in a syndicated loan, to other investors — as and when needed.

A syndicated loan is structured, arranged and administered by the lead arranger or arranging bank — typically a commercial or investment bank. The lead arranger works together with the borrower, to come to agreeable terms — in the form of interest rates, repayments, term-lengths and related details.

Syndicating the loan enables banks to spread the risks, and enjoy the financial opportunities that their individual capital base — would not otherwise allow.

Key parties to a syndicated loan may include:

  • Arranger or lead bank: in charge of structuring the loan
  • Underwriting bank (optional): guarantees the required loan amount will be made available
  • Lenders or participating banks: each lend a percentage of the entire loan amount
  • Facility agent: administers the loan e.g. disbursing and managing repayments
  • Borrower: seeks to borrow funds and will eventually make repayment
  • Security trustee: responsible for holding the security (collateral) for the loan — on behalf of lenders

How does loan syndication work?

As loan syndication is highly tailored, companies are likely to have specific requirements — that ultimately shape how the loan syndication process works.

In the general sense, your business would approach a suitable lender — to discuss your needs. Lenders would seek to vet your company’s finances and do a credit assessment. Accordingly, you will need to provide extensive information on your business.

Your loan application may then be accepted in principle, subject to the lead arranger being able to find other lenders — that are willing to participate in the deal.

To find participants, the arranger prepares documents (information memorandum) describing the terms of the transaction, investment considerations, terms and conditions, and a financial model. Subsequently, invitations are sent out to banks — to participate in the syndication.

Eventually, the syndicated loan may comprise of a revolving credit facility and a secured term loan.

Interest rates on the loan can be fixed or floating. Margin, commitment, utilization and extension fees may also apply.

Types of syndicated loan

Underwritten deal

A lender or a group of lenders may underwrite the facility — committing or guaranteeing to provide the needed amount. Syndication to other lenders follows.

Best-efforts deal

With a best efforts deal, the entire loan amount is not guaranteed. Should there be an unsubscribed portion of the loan — the borrower may be forced to accept a lower amount. In some cases, the loan facility may be canceled entirely.

Club deal

A club deal can be seen as more of a “self-arranged” syndication. Here a borrower leverages its existing relationships, with various banks, and in doing so coordinates a loan syndication facility. In a club deal lenders usually contribute to the loan equally.

Benefits of a syndicated loan

  • Borrower only needs to deal with the arranging bank (who in practice, is the same as the facility agent)
  • A tailored solution — structured in different forms of loans and securities
  • Large amounts of money can be raised
  • Borrowers build credibility — as multiple banks are willing to lend

Limitations of a syndicated loan

  • Pricing consensus required among syndicate banks
  • Costs incurred for the agent bank role
  • May be difficult to satisfy all the lenders — should any problems occur

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