Loan Syndication

Hemlata Jain

• Project finance-in form of rupee & foreign currency loan for new units, expansion, diversification & modernisation. Sources of funds for DFIs- bond issue mostly long term bonds Disbursement trends-pvt sector has progressively reduced their dependence on institutional funds Alternative option available to companies in the form of issue of shares at prem, pvt placement of debentures, GDRs, internal generation of funds

• Term loans-from DFI, DB, IFCI, SFC constitute about 10% of sources of funds for corporates. • Dev Fis:  IDBI-estd 1964 under Act of parliament- provides direct fin assistance to large & medium ind units, small ind sector having been transferred to SIDBI.  ICICI-estd 1955, public ltd co to encourage & assist ind units in the country-provides term loans in Indian & foreign currencies, underwrites issues of shares & debentures, makes direct subscription to issues & guarantees payment for credit undertaken

IFCI-set up as statutory fin corp in 1948.  SFCs-set up under SFC Act 1951. equity type assistance under special capital & seed capital schemes to entrepreneurs having viable projects but lacking adequate funds of their own. direct subscription to equity/ debentures.term loan assistance to small & medium enterprises. . discounting of bills & guarantees. recently converted into a public ltd co to give flexibilty to its operations-provides project finance & promotional services. 18 SFCs at present.

• Refinance to comm bks under Automatic Refinance Scheme (limit raised from 10 to 50 lacs & refinance enhanced from 75 to 90 % of term loans. • Also coordination of functions of institutions engaged in promotion.• SIDBI.-principal Fi for promotion.estd 1989-IDBI’S o/s p/f totalling 4000cr transferred to SIDBI on 31-3-1990• apex bk for tiny & small scale ind. • Equipment finance for modernisation & technology upgradation of existing units. . financing & developing ind concerns in SSI sector. financing & dev of ind units in SSI sector.

hatchery.sponsored by IFCI. fishing & related ind including aquaculture. IRBI. 1996. SCICI (shipping credit & invst co of India)-estd 1987 by ICICI for dev of shipping.  TFCI. car rental services. lease assistance & direct subscription to shares-conventional tourism projects & non conventional ones like amusement parks. LIC. food processing & associated infrastructure facilities-merged with ICICI w.e. on & off shore oil survey. GIC. air taxi passenger facilities. exploration & production. April sanction project loans. Comm Bks .…  UTI.estd 1989.f. fish processing.

MB help clients approach Fis for term loans• which Fi to be approached depends on ind. • All India Fis –projects above 10cr • SFCs-upto 1.5 cr • SIDCs –upto 90 lacs .• Borrowings from Fis. location of unit & size of project cost.

1. Japanese yen loans.5%over LIBOR .a • “ “ “ “ DM-9.5% rates depends on rate applicable to foreign currency funds utilised by Fis • Fixed rate loans in US $-10% p. • “ “ “ “ SF.a.a.• FOREIGN CURRENCY LOANS-Eurodollar loans. Deutsche mark Revolving Funds• provided by Fis wherever imported mach & equip necessary• covers CIF value of capital goods & know how fees. • Floating rate loans linked to LIBOR.8% p.

then design capital struc• choice to be based on cost of capital & ability of unit to yield reqd rate of return. a commitment charge of 1% on amt not drawn. . effective rate is 23%. • MB to appraise project viability.• All india Fis operate ERAS (exch rate adm scheme) to cover risk of foreign exc rate fluctuations• charge composite rate to borrower & carry risk themselves• rate is 23-26%.

unsecured loans. • Promoter’s contr may be in form of subs to capital. IDBI RCTC & SIDBI from 10-30 lacs depending on size of project & promoter’s contr upto max 15 lacs. • “A” areas & projects promoted by techno-entrepreneurs17.5% • “C” areas. if deserving case (qualified or experienced entrepreneur). convertible deb issued as rights to existing holders & cash accruals in case of existing co.20% • Concessional norms at discretion of FI-if promoters have resources or project risk high.seed capital assistance of SFC.5%.17.higher promoter contr may be insisted • If promoters unable to bring contr. right issue sh.• Promoter’s contr-20 % of project cost. project above 25 cr-12.5% • “B” areas. .

technocrats & NRIs • Project –ve listCigarettes. modernisation. new jute mills. toilet & cosmetic preparation. export intensive. plywood. alcohol. agri & rural dev. powerlooms. indigenous & advanced technology. in backward areas. conveyor belting. export oriented. energy conservation & those promoted by new entrepreneurs. .calcium carbide.• Priority to projects in infrastructure.other tobacco products. import substitution. new material.

technical skills. preliminary meeting fixed with FI. relevant experience & fin soundness. • With loan app: MOA. latest annual report/ statement of accounts to be filed. . • if it agrees to consider loan proposal. if loan is guaranteed. Also. AOA.• After determining eligibility to term loan. COI. application with req details to be submittedpromoter’s background. documents of guarantor co.

• WC to be estimated.• Cash flow statement for 7-10 yrs • Land for project. quotations of mach. Obtained from atleast 2. comm bk to be approached • MB would make due deligence statement . plan for bldg.

DE ratio.6 to 2 times to assure that project has inherent strength & potential to service debt. . • Security margin-term loan sanctioned against security of fixed assets leaving adequate security margin.20%.used to measure payment of int & principal within the stipulated time-gross cash accruals should normally be 1. • DSCR. DE 3:1 for small ind units & 2:1 for large & medium units.• Final structure of financing emerges after considering promoter’s contr. DSCR & security margin • Promoter’s contr.

bonus issue .appointment of mgt personnel.should not contain any restrictive clause against covenants of Fis  Lien on all f.• Term loans granted subject to foll conditions:  land (as security).  Personal & corporate guarantees of major sh holders & associate concerns  Promoter’s undertaking to finance fund shortfalls/ cost overruns. non-disposal of holding for 3 yrs  DFIs approval of. further cap exp.encumbrance free  Ins of assets.bldg & mach separately  Scrutiny of AOA.a. dividend payment.

IT & WT clearance of promoters & directors  Pollution clearance  architects & auditors certificate for civil cons. . legal documents creating charge  Personal guarantees & undertakings. title deeds of land  Gen body resolution for creation of charge over assets.• Req to be met after loan is sanctioned Acceptance of terms & conditions  Deposit of legal charges  Details of plot or land for project.

subscribed & paid up capital to brought in by promoters. cheque made in name of supplier. • In large projects. disbursements made on basis of assets created at site.• Before loan disbursement. stamp duty & reg fees paid. • Security to match every disbursement starting with land & bldgs • Balance after security margin paid by DFI. term loan disbursed at 75% of value. disbursements are need basedpromoters to bring in their entire contr first . creation & registration of charge on present & future assets of co • After req complied. documents to be executed & submitted.

borrowing from single DFI restrictive.g. corporate borrower does not face rigid terms( take it or leave it) situation  Cost of syndication to vary with credit risk.experience in loan syndication- . loan syndication used as alternative to consortium lending. tenor & price.. efficient pricing. benefits reaped are amt.• In some cases. • Loan syndication.SBI & Canara bk.high credit standing ensures best terms  E.bridge loan granted against bk guarantee.

. lead bk prepares placement memorandum to mkt loan to other bks• it helps bks understand the transaction & provide inf about borrower-bks use the memorandum for inf about the borrower & the transaction. specifying amt & tenor of loan. mandate to organise the loan awarded by borrower to 1 or 2 major bks• lead bk to syndicate loan on firm commitment basis or on a best effort basis• on receiving mandate from borrower. • On receiving query. borrower approaches several bks willing to syndicate a loan. syndicate or lead bk looks around for bks willing to participate in the syndicate• after competitive bidding procedure.• In loan syndication. make reasonable appraisal of credit & decide about participation in the loan.

• If bk decides to become a member. • Int charge may be fixed or floating . Int on stand by portion charged on amt withdrawncommitment fee charged on unutilised portion.agents fees yearly charge • Syndicated loan would have a funded component/core component on which int charged on loan & stand-by loan.. it indicates amt & price it will charge on the loan • On receiving inf from all the bks. lead bk prepares common document to be signed by all members of syndicate & the borrowing co • borrower signs only 1 document but shares separate contractual relationship with each member • Agent or lead bkr attends to all adm wk.

tax provisions. fixed or floating charge on assets. default accelerating loan repayment. biz health.provision on tenor. prepayment clause specifying occasion on which it is permitted. representations & warranties about borrowers. int & repayment. compliance with laws.• Syndication document. regulations. hypothecation of assets for WC. pledge. agency clause. security. .

.india’s credit rating fell below invst grade-put limits on ECB • Predominance of short term borrowing & withdrawal of NRI deposits led to net outflows under ECB • BOP crisis successfully handled.keeps close watch to keep it within manageable limits. implementation of structural reforms since july 1991 restored investor confidence. • GOI does not permit large expansion of comm debt.Loan syndication: external • Gulf crisis.

sub borrowers do not need separate approvals from the govt • Applications to contain the foll details approval for import from relevant authorities where such approval reqd  details of offer from 1 or more lender  details of contact person/ office with tel no to enable quick reference to be made.• Procedure for approval – approval of dept of economic affairs necessary for all credit proposals where loan taken directly from foreign lender by borrower as actual user of loan or by a fin intermediary signing a framewk credit agreement. In latter case. if clarifications are needed. .

int fin inst like World Bk are regular borrowers.they were big.recession in advanced ind countries depressed mkts  Loans were initially granted to corporate customers going multinational. borrowers included virtually unknown firms due to massive flow of funds into the mkt  Govt & govt related borrowers resorted to medium euro credit mkt for ind & infrastruc projects & to fin BOP deficits. Eurodollar mkt:  Consists of int bks. Also. well known & of good standing.• Approval letter will be issued by ECB Div of Dept of Economic Affairs. . Gen fund availability on an av about $500 billion. forex bks & special institutions. Ministry of Finance. fin cos.  With passage of time.

even 15 days when loan small or borrower familiar as terms & placement memo can be settled quickly- . diversification of sovereign risks arising in int lending. Lead bk assembles mgt grp of other bks to u/w loans & mkt shares to other participating bkscompetitive bidding. firms raising funds in Eurodollar mkt can deploy anywhere till lender is satisfied that loan servicing is not affected.borrower awards mandate – lead bk’s sh of loan atleast as large as any other lenderplacement memorandum prepared-bks appraise credit – participate in the loan50 to 70% sh of initial u/w is lead bkr’s. Loan syndication: Need: large size of loans. wide variety of & participating.• Eurodollar mkt not constrained by funds availability like national mkts adopting credit rationing. Procedure: 3 level of bks. • size $500.000 to several bnnormal duration 6 wks.lead.

no placement memo prepared.a.1/8%. • Front end fees include participation & mgt feesparticipation fees divided among bks in proportion to sh in pds of mkt uncertainty when MNC bks not willing to do biz • Pricing of eurodollar loan. . front end fees.5%.rollover credit pricing usedlibor & spread (1/8% to 1. 0.5%to 1% respectively.000 p. commitment fees. 0. mgt fees divided between u/w bks & lead bks.5 %) • -also praecipium. Agents fees. annual agents fees.yearly charge-may be about $10.• Club loans-funded by lead bk & managers.small loans to frequent borrowers.

libor 10%. loan $100 mn.• Annual charges-(libor + spread) * multiplied by amt of loan +praecipium * amt of loan + commitment fee * amt of loan undrawn + annual agents fee • Front end chargesparticipation fee * amt of loan mgt fee * amt of loan + initial agents fee. term 7 yrs .g. if any e. no grace pd. price 100 basis pt above libor .

funding in yet another country. obligations of the parent co in case of loan to MNCs. booking of loan in another country. int payment dates & amortisation dates.• Compared to domestic FI loans.courts in several countries render judgement in domestic currency only .New York often chosen 2) judgement currency clauses. eurodollar loan agreements simple. cross default clause stipulating that loan in default when parent co defaults on its loans • International character of the loan-1) jurisdiction: Borrower in 1 country.contain fewer restrictive covenants • Loan document contains clauses covering pricing.

affected by means of transfer of funds from 1 bk to another in country of the currency in which loan denominated.borrowers normally receive funds in place of their choice • Guarantee clause-syndicated loans have no collateralbk guarantee reqd & bk should satisfy capital adequacy norms • Res req clause-when subject to central bk jurisdiction. lending bks in eurodollar mkts are free of any res regulations imposed. This clause stipulates – borrower has to absorb any additional cost the lender incurs when res req are imposed • Lending bks req payments of principal & int free of taxes .• Place & method of payment.

permits bk to call for pre payment if sufficient dollar fund not available. . bonds issued by borrower of nationality diff from country of capital mkt in which securities issued. Also. u/w & sold in more than 1 mkt simultaneously thru int syndicates • Cos & govt prefer bk loan or syndicated loan rather than tap int bond cheaper & large amt can be raised. loans more flexible than bonds & allow for switching of currencies & early payment • Medium & long term credits are priced on a short term rollover basis.15 yr.• Euro dollar availability clause.largest int bond not exceeded $ 100 mn but a syndicated loan goes well beyond US $ 1 bn. • Eurobonds.duration: 10.

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