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Syndicated Loan or Loan Syndication

Syndicated Loan or Loan Syndication

Meaning of Loan Syndication or Syndicated Loan
Syndicated loan is a type of loan offered by a group of lenders (named a syndicate) who work jointly to provide funds for a single borrower.

The borrower could be in form of a corporation, a large project, or sovereignty (such as a government). The loan may involve fixed amounts, a credit line, or a combination of the two. Interest rates can be fixed for the term of the loan or floating based on a benchmark rate such as the London Interbank Offered Rate (LIBOR).

Usually, there is a lead bank or underwriter of the loan known as the ‘arranger’, ‘agent’, or lead lender’. This lender may be putting up a proportionally bigger share of the loan, or perform duties like dispersing cash flows amongst the other syndicate members and administrative tasks. It is also known as a "syndicated bank facility".

Objectives/Reasons of Syndicated Loan Lending
The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders such as banks or institutional investors like pension funds and hedge funds. Because syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower defaulting could cripple a single lender.

Syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding.

Syndicated loans can be made on a "best efforts" basis, which means that if enough investors can't be found, the amount the borrower receives will be originally lower than anticipated. These loans can also be split into dual trenches for banks (who fund standard revolvers or lines of credit) and institutional investors (who fund fixed-rate term loans).

It is the process of involving several different lenders in providing various portions of a loan. Mainly used in extremely large loan situations, syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because the lender isn't the only creditor.

Syndicated loans are large loans made by the joint agreement of two or more institutions (Dennis and Mullineaux, 2000).

The main reason behind the joint lending is the high risk of these credits due to the size of the loan and the regulator’s limitation on the maximum ratio of any single loan to bank’s equity capital. Several other motivations are documented for joint-lending.

Roles within the Syndication Process
This is the bank that has been awarded mandate by prospective borrower and he is responsible for placing the syndicated loan to other banks. Arranger has to ensure that issue is fully subscribed.

The bank that commits to supply the funds to the borrower - if necessary from its own resources or if the loan is not fully subscribed. Underwriter may be the arranging bank or another bank.

It should be noted that not all syndicated loans are fully underwritten. Risk is that the loan may not be fully subscribed and underwriter has to supply funds committed.

The bank that participates in the syndication by lending a portion of the total amount required.

This is the person that takes care of the administrative arrangements over the term of the loan (e.g. disbursements, repayments, compliance, etc). He acts for the banks.

Benefits of Loan Syndication to the Borrowers
Deals with a single bank: As stated earlier borrower in case of syndicated loan facility doesn't need to deal with each and every lender. Borrower has to deal with lead manager only.

This saves time and administrative expense of borrower because it is quicker and simpler than other ways of raising capital. Borrower can alternatively raise capital through other sources. He can issue share, debenture etc. But this entire route involves substantial cost and time. Syndication is a better option in this regard.

Benefits of Loan Syndication to the Lead Banks
Good arrangement and other fees can be earned without committing capital: Lead manager earns fees because of his services to borrower. This can be done without committing any capital.

Enhancement of bank's relationship with the client: Because lead banker deals with client his relationship with client enhances that can bring business for bank in long term.

Benefits of Loan Syndication to the Participating Banks
They have access to lend opportunities with low marketing costs.

Opportunities to participate in future syndications in case the borrower runs into difficulties, participant banks have equal treatment.

Stages Involve in Syndicated Loan Lending
The prospective borrower may liaise with a single bank or it may invite competitive bids from a number of banks. The lead bank needs to identify the needs of the borrower and designs an appropriate loan structure. Then develop a persuasive credit proposal to obtain internal approval.

The lead bank can start to sell the loan in the marketplace. He needs to prepare an information memorandum, term sheet, legal documentation and then approach selected bank and invite participation.

Lead manager need to negotiate with borrower at this stage to satisfy participant's concern if any.

The agent now handles the day-to-day running of the loan facility. In addition, another benefit of loan syndications for borrowers is the provision of loans to the borrowers with a more complete menu of financing options.

In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond markets. This has resulted in a more competitive corporate finance market, which has permitted issuers to achieve more market-oriented and cost-effective financing.

Merely looking at the objectives and benefits of syndicated loans to the borrowers, lead banks and participating banks, it is obvious that this is the most simple and easy to operate loan type or process than the normal bank loan so as to diverse the risks involved in a particular lending.

Also, the time involve and administrative expenses to be incurred by intending borrower is safe and low comparing to other means of raising funds in order to finance an identified business.

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