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Loan Syndication

Structured Finance and Investments Division


The Cyprus Development Bank
DEFINITION

A SYNDICATED FACILITY IS A LENDING FACILITY, DEFINED BY


A SINGLE LOAN AGREEMENT, IN WHICH SEVERAL OR MANY
BANKS PARTICIPATE.
WHEN IS IT THE RIGHT SOLUTION?

• 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.
ROLES WITHIN THE SYNDICATION PROCESS

1. ARRANGER / LEAD MANAGER


• THE BANK THAT:
- IS AWARDED THE MANDATE BY THE PROSPECTIVE
BORROWER, AND
- IS RESPONSIBLE FOR PLACING THE SYNDICATED LOAN
WITH OTHER BANKS AND ENSURING THAT THE
SYNDICATION IS FULLY SUBSCRIBED.

• ARRANGEMENT FEE

• REPUTATION RISK
ROLES WITHIN THE SYNDICATION PROCESS
2. UNDERWRITING BANK
• THE BANK THAT COMMITS TO SUPPLYING THE FUNDS TO
THE BORRWOER - IF NECESSARY FROM ITS OWN
RESOURCES IF THE LOAN IS NOT FULLY SUBSCRIBED.

• MAY BE THE ARRANGING BANK OR ANOTHER BANK.

• NOT ALL SYNDICATED LOANS ARE FULLY


UNDERWRITTEN.

• RISK: THE LOAN MAY NOT BE FULLY SUBSCRIBED.


ROLES WITHIN THE SYNDICATION PROCESS

3. PARTICIPATING BANK
• THE BANK THAT PARTICIPATES IN THE SYNDICATION BY
LENDING A PORTION OF THE TOTAL AMOUNT REQUIRED.

• INTEREST AND PARTICIPATION FEE.

• RISKS:
- BORROWER CREDIT RISK (AS NORMAL LOANS).
- A PARTICIPATING BANK MAY BE LED INTO PASSIVE
APPROVAL AND COMPLACENCY (i.e. SO MANY HIGH
PROFILE BANKS CANNOT BE WRONG!).
ROLES WITHIN THE SYNDICATION PROCESS

4. FACILITY MANAGER / AGENT


• THE ONE THAT TAKES CARE OF THE ADMINISTRATIVE
ARRANGEMENTS OVER THE TERM OF THE LOAN (E.G.
DISBURSEMENTS, REPAYMENTS, COMPLIANCE).

• ACTS FOR THE BANKS.

• MAY BE THE ARRANGING/UNDERWRITING BANK.

• IN LARGER SYNDICATIONS CO-ARRANGER AND CO-


MANAGER MAY BE USED.
BENEFITS TO THE BORROWER

• DEALS WITH A SINGLE BANK.

• QUICKER AND SIMPLER THAN OTHER WAYS OF RAISING


CAPITAL (E.G. ISSUE OF BONDS OR EQUITY).
BENEFITS TO THE LEAD BANKS

• GOOD ARRANGEMENT AND OTHER FEES CAN BE


EARNED WITHOUT COMMITTING CAPITAL.

• ENHANCEMENT OF BANK’S REPUTATION.

• EHNANCEMENT OF BANK’S RELATIONSHIP WITH THE


CLIENT.
BENEFITS TO THE PARTICIPATING BANKS

• ACCESS TO LENDING OPPORTUNITIES WITH LOW


MARKETING COSTS.

• OPPORTUNITIES TO PARTICIPATE IN FUTURE


SYNDICATIONS.

• IN CASE THE BORROWER RUNS INTO DIFFICULTIES,


PARTICPANT BANKS HAVE EQUAL TREATMENT.

• PARTICIPANT BANKS DO NOT FIND THEMSELVES AT A


DISADVANTAGE VIS-!-VIS A DOMINAT BANK OR ONE
WITH HIGH LEVERAGE OVER THE CLIENT.
STAGES
1. PRE-MANDATE PHASE
• 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.
- DESIGN AN APPROPRIATE LOAN STRUCTURE.
- DEVELOP A PERSUASIVE CREDIT PROPOSAL.
- OBTAIN INTERNAL APPROVAL.

• MILESTONE: AWARD OF THE MANDATE.


STAGES
2. PLACING THE LOAN
• THE LEAD BANK CAN START TO SELL THE LOAN IN THE
MARKETPLACE.

• THE LEAD BANK NEEDS TO:


- PREPARE AN INFORMATION MEMORANDUM
- PREPARE A TERM SHEET
- PREPARE LEGAL DOCUMENTATION
- APPROACH SELECTED BANKS AND INVITE
PARTICIPATION

• NEGOTIATIONS WITH THE BORROWER MAY BE NEEDED IF


PROSPECTIVE PARTICIPANTS RAISE CONCERNS.

• MILESTONE: CLOSING OF THE SYNDICATION, INCLUDING


SIGNING.
STAGES

3. POST-CLOSURE PHASE

• THE AGENT NOW HANDLES THE DAY-TO-DAY RUNNING


OF THE LOAN FACILITY.
PRICING

• FEES FOR “FRONT-END ACTIVITIES” - ARRANGEMENT


AND UNDERWRITING FEES.

• INTEREST (MARGIN OVER BASE RATE).

• COMMITMENT FEES FOR AVAILABLE BUT UNDRAWN


FUNDS.

• AGENCY FEES - PAYABLE FOR ADMINISTRATIVE ACTIVITY


DURING THE TERM OF THE LOAN.
DOCUMENTATION

• SPECIALIST LAWYERS WORKING CLOSELY WITH ALL THE


BANKS.

• THE ROLE OF EACH PARTY IS CLEARLY DEFINED.

• SOME STANDARD CLAUSES ARE INCLUDED.


MARKET AND COMPETITION

• SYNDICATIONS IN CYPRUS ARE FORMED FOR THE


DEVELOPMENT OF BIG PROJECTS AND FOR
REFINANCING PURPOSES.
• EXAMPLES:
– APHRODITE HILLS - CYP30M - ARRANGER/AGENT: HSBC.
– TAKE OVER OF THE SHARES OF HILTON HOTEL BY LOUIS
GROUP - CYP16M - ARRANGER/AGENT: HSBC.
– TAKE OVER OF ROCL SHARES BY LOUIS - USD30M -
AGENT/ARRANGER: HSBC.
– ACQUISITION OF THE VESSEL EMERALD BY LOUIS - USD20M
- ARRANGER: HSBC - AGENT: SOCIETE GENERALE
– CONSTRUCTION OF ELYSIUM BEACH RESORT -
ARRANGER/AGENT: CYPRUS POPULAR BANK.
Benefits of loan syndications for borrowers
Syndicated loans provide 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.