Sunday, March 6

Educationists’ Observations and Example of Loan Syndication


 
Introduction
A syndicated facility is a lending facility, defined by a single loan agreement, in which several or many banks can participate. A borrower wants to raise a relatively large amount of money quickly and conveniently. The amount exceeds the exposure limits or appetite of any one lender. The borrower does not want to deal with a large number of lenders. So what should he do? Even lender doesn't want to miss this opportunity. They can simply use loan syndication facility. By this approach borrower gets desired amount without dealing with multiple lenders while lenders do not miss a profitable loan proposal due to low exposure limit and minimize their risk. The market for syndicated loans is huge.

These are the Educationists’ Observations on Loan Syndication:
*Davis (1995) asserts that the development of the syndicated credit reduces the sunk cost that banks need to incur in order to enter the international markets, as a single deal could involve many banks with only one set of documentation and credit appraisal.

*Waheed and Mathur’s (1993) emphasize is on the diversification effect of international lending and say that it might provide risk reduction benefits for lender banks or institutions in addition to those that could be achieved from domestic loans alone.

*Armstrong (2003) points out the fees and commissions that the lead banks collect are beneficial to the lenders.

*At the borrower’s side, Kim (1993) claims that the syndication is a way to raise large amount of funds on competitive terms within a short period of time.

*Gasbarro, Le, Schwebach and Zumwalt (2004) assert that syndication may be a better alternative than a bond issue because if a repayment problem occurs, it is easier to renew it compared to a bond alternative.

*Karaoğlu (2005) defines the securitization as the process of transferring loans to third parties through the issuance of debt whose cash-flows are collateralized by the loan pool.

*Senior (2006) defines the same process as: securitization is a process that converts illiquid assets into the liquid assets and provides an attractive funding source, because its cost is lower compared to the alternative funding schemes. Securitization is not only related to the assets in the balance sheet but also to future flow of the receivables (Kethar and Ratha, 2001) and may be used as a tool for risk management (Karaoğlu, 2005). Syndicated loan announcements and their effect on the borrower firm’s share value has been the subject of many academicals studies.

*Fery, Gasbarro, Woodliff and Zumwalt (2003) analyze the effect of loan agreements for the Australian firms, listed on the Australian Stock Exchange market for the January 1983 to December 1999 period. Their results indicate that all corporate loan announcements (196 cases) produce a positive and significant Cumulative Average Excess Return (CAER) at the 5% confidence level. When they group the data as published and non-published, they find that CAER of the published loan announcements (45 cases) lead to a positive and significant return in the market while non-published announcements produced no statistically significant CAER. They further investigate the effect of lender status and find that a single lender provides a positive CAER for published announcements. Multiple lenders for published agreements and all other non-published announcements produce insignificant effects.

*Billett, Flannery and Garfinkel (1995) primarily focus on the lender characteristics in order to determine the market effect. Analysis show that all loans produce positive and significant return. The sub-section of sample indicates that bank loans have positive effect and non-bank loans seem to be insignificant. Banks rated AAA create a positive CAER but banks rated BAA and lover produce insignificant returns.

*Aintablian and Roberts (2000) studied the effect of corporate loan announcements on the value of Canadian firms. Their results indicate that bank loans produce a significant and positive AR while private placements do not bring any significant AR. They also analyze the new loans and find that new loans with the same bank produce the significant AR but new loans with the new bank and unknown bank do not bring any significant AR. One more finding of this study is that conditional renewal produce statistically insignificant negative AR and favorable and mixed renewals produce a positive and significant AR.

Example of Loan Syndication
For instance, suppose you need 100 crore Rupees for an investment project. You go to a bank, they tell you that they cannot finance more than 10 crore Rupees and so you move to a new lender. Here again you find same difficulty. So now you have an option to take loan from multiple lenders. In this case you have to deal with multiple lenders for single investment project. Here borrower can use loan syndication facility. He needs to appoint one arranger or lead manager. This bank place the syndicated loan to other banks and makes sure that syndication is fully subscribed.

In 2003, banks extended close to USD 2 trillion in syndicated loans. The standard theory for why banks join forces in a syndicate is risk diversification. The banks in the syndicate share the risk of large, indivisible investment projects. Syndicates may also arise because additional syndicate members provide informative opinions of investment projects or additional expertise after the funding has been extended.


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