A Complete Guide To Loan Syndication

 

Loan Syndication is the process where several lenders come together to fund a loan for a large borrower. It helps businesses, finance buyouts, growth, and production capacity, etc.

 

Parties Involved in Loan Syndication

Although the parties engaged in loan syndication might vary from one deal to another, they often comprise the following participants:

 Syndicating Bank/Lead Bank (Arranging Bank)

The bank in charge of managing the loan syndication is known as the syndicating bank. The responsibility of arranging all of the funds in accordance with the borrower’s requirement lies with the lead bank/syndicating bank. They are expected to find other lenders that are willing to join the loan syndicate and share the associated lending risks.

It is this bank's responsibility to thoroughly appraise and assess the proposal/project and prepare the ‘Preliminary Information Memorandum’ (PIM) and then discuss the term sheet with the borrower. This PIM and term sheet are then shared with the other proposed lenders. The term sheet contains the terms that have been agreed upon by the lead bank and borrower. It contains information on the loan, such as the loan's amount, tenure, interest rate, and any additional costs, etc. The lead bank is in charge of apportioning cash flow among the participating lenders and is generally the largest lender in the group.

 Trustee

For the benefit of the lenders, the trustee is in charge of keeping the borrower's assets/documents as security. Since doing so would be expensive for the syndicate members, secured loan arrangements avoid giving the security to the individual lenders independently. The trustee is in charge of enforcing the security as directed by the lenders in the case of default. Therefore, the trustee's fiduciary responsibility is limited to the syndicate of lenders.

 Agent Bank

In a syndicated loan, the agent bank/escrow account bank acts as a liaison between the borrower and the lenders and is contractually obligated to both parties. The agent bank's main duty is to transfer the loan amount from the participating banks to the borrower and to transfer the principal and interest of the loan repaid by the borrower to the participating banks. The agent's job also entails giving lenders the information they need to exercise their rights under the terms of the syndicated loan agreement.

Types of syndicated loans

• Underwritten Deal

In accordance with this agreement, the syndicating bank underwrites the full loan amount. If the loan isn't subscribed in its entirety, the syndicating bank has to absorb the undersubscribed portion. Higher service fees are charged for loan syndication of this nature.

 Best-Efforts Syndication

• Also known as best efforts offering. A syndicating bank will employ its best efforts (or commercially reasonable efforts) to put together a group of lenders who will make the loan.

 In ''best-effort'' financing, the arranger only makes commitments to provide its best effort- a subjective standard- to underwrite the entire loan amount. The conditions are renegotiated if the loan is not completely syndicated, or the loan does not get closed. 

 Club Deal

The club deal may be employed when a borrower needs financing that a bank is unable to arrange on its own. In a club arrangement, a group (syndicate) of banks initially underwrites the entire amount of a multilateral loan. The loan is underwritten by all club members.

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