Table of Contents

• What is Loan Syndication?
• Participants in Syndication
• Types of Syndication
• Fees and Charges
• Credit Risk
• Process of Syndication
• Salient Features

What is Loan Syndication?

• Per party exposure limit.
• Per sector or industry exposure limit.
• Per country exposure limit.
• Per currency exposure limit.
• Diversification Policy.

 Banker discusses the client's (prospective borrower) requirements with the client. The banker takes the borrower's approval in principle to make an offer. Banker comes up with a proposal of structuring a pool of funds by inviting other interested banks to participate in the lending. This is called syndication. As evident from the literary meaning, it’s a group of lenders financing a bank's borrower.  It is a loan facility offered by banks and financial institutions in joining hands with a bank (the Arranger) to finance the credit requirements of its (Arranger's) applicant/ client. The participating banks have no direct relationship with the borrower except the Arranger; rather they deal with the bank normally called Lead Bank/ Arranger.

Participants in Syndication

 Lead Bank/ Lead Arranger or underwriter and Co-Arranger;

This is generally the bank(s) leading the sourcing of funds i.e. ascertaining the creditworthiness of the borrower and his credit/funds requirements. Lead Bank(s) structure the loan by defining the terms of the contract that comply with the market practices and meet the borrower’s demand, identify the role of other banks, fees, and price of the facility. The lead bank is responsible for selling the loan to the interested group i.e. identifying & approaching the interested investors and identifying the typed of sell-down. Arranger underwrites the major portion of the loan or in other cases the whole of the unsubscribed portion of the loan. Arranger also maintains the books (book runner) and takes care of the covenants of the loan on behalf of all participants. Co-Arranger shares the underwriting and the arrangement fee on a predetermined formula.

 Agent Bank; 

Arranger assigns the role of the agency to a member bank. Agent bank act as an agent of the banks and maintains a continuous relationship with the borrower during the life of the syndicate. In case there is an Agent bank he may act as a book runner and a pool bank, a coordinator between the lenders and borrower. Drawdown and distribution of repayments. The agent may take care of the covenants, publicity of the facility, and as a trustee bank.

 Trustee Bank 

Arranger may assign this role to a separate bank. Agent Bank or any other bank among the participating institutions may be assigned the role of a trustee. A trustee bank is holding the securities and collateral in trust on behalf of the syndicators.

Besides the above banks with their roles in different capacities, other banks and financial institutions subscribing to the syndication as participating banks/ institutions.

Borrower

 He is the one who is causing the syndication. He needs funds for his business as an entity

Types of Syndication

 The Lead Bank or Lead arranger when arranging a syndicated loan on a “Best efforts basis” means that the Arranger bank or any other participating bank does not commit/ underwrite any amount or residual amount of the loan rather the borrower is given a range like 300 to 500 million. The lead arranger will try based on his best efforts to convince banks to participate in the loan facility and raise the maximum amount. A minimum range of five million or above can be subscribed by each participant. Whatever amount is subscribed to the syndicate by the participants, is conveyed to the borrower. If the borrower is comfortable with the amount that has been pooled up, the syndicate is proceeded with otherwise dropped at that juncture.

 A syndicated loan based on “Underwriting”; is the type in which the Lead Bank or  Arranger bank underwrites a fixed amount or in other cases the unsubscribed amount of the syndicated loan/ amount of demand of the borrower.  The lead arranger is sometimes seconded by another bank in underwriting and so is called the co-arranger/ lead. Lead Bank tries based on “Underwriting” to convince banks to participate in the loan facility and raise the target amount. Arranger approaches and invites a large number of the bank to the facility. A minimum subscription of 5 million or above is proposed to each participant. Whatever amount is subscribed to the syndicate by the participants, the remaining amount is subscribed by the underwriters.

Club Deals Syndicate Loan refers to the syndicated loan arranged by a club of banks. It can be extended to the large corporate borrower and even more than one borrower. There is no specific underwriting as banks have already earmarked an equal amount of funds for the club which is tantamount to underwriting. No participation request, no roadshows. Generally, such loans are extended to sovereign states and multinationals.

 Fees and Charges

 Commission, fee, and charges vary with the type of syndicate. Those arranged on best efforts basis may charge less than those arranged on an underwriting basis. However, the charges include the Arrangement fee, Underwriting fee, Agency fee, Commitment fee, and Participation fee. All these fees are paid up-front.

 Credit Risk

 Lead Bank or A lead arranger is the one that leads and arranges the syndicate. He is by no means taking responsibility or may be held responsible for any credit risk on behalf of the participating Banks. By default, each subscriber shall take his own credit decision based on the information provided by the arranger. The information is not limited to the information memorandum only. If any or all of the participating banks need further information or clarification for an informed credit decision, it is the responsibility of the arranger to make available such information from the prospective borrower to the satisfaction of the participating banks. Once the syndicate is closed, each subscriber carries his own burden of credit decision to the extent of one’s participation limit.

Process of Syndication

 The Arranger prepares a term sheet and gets it agreed upon by the borrower. Thereafter an information dossier that is called an “Information Memorandum” is prepared from the information supplied by the borrower which includes;

•     Purpose of the Loan facility.
•     Description of the Transaction.
•     Detail on the borrower.
•     Securities and collaterals.
•     Financial Information - historical and projected.
•     Disclaimer.
•     Any other relevant information.

The term sheet contains all the terms of the credit and covenants right from the name of the borrower, rate of return, fees, draw-down mechanism, repayment schedule, collaterals, covenants, conditions precedent, etc. Roadshows are arranged at different centers and countries if required. Banks are invited to the roadshows and at the close of the roadshow tentative commitment is usually received from among the participating banks. This gives the arranger and borrower an idea of the acceptability and possible outcome of the proposed syndicated loan facility. 

Invitation letters/emails are dropped to the interested parties. For those showing interest and indicating a certain amount of investment, participants are invited to sign a confidentiality agreement so that further information (information memorandum) required for internal approvals of credit decisions is shared in confidence with the interested banks and financial institutions.

 When the confirmations of commitment are received by the arranger, legal documentation is completed, and a signing-off is scheduled. On the scheduled date the agreement documents are inked followed by gifts and a feast. Drawdown is conveyed to the participating bank through the focal contacts, showing the payment instructions with the date and amount.

 Salient Features

•  A large amount can be extended.
• The period may range from 3 to 15 years.
• The rate of return is comparatively high.
• The rate of return may be fixed or floating depending on the trend in interest rates.
• The extent of credit risk is minimized by spreading it over several institutions.
• Borrower may be a corporation, a state organ/department, or even a sovereign state.