Professional Documents
Culture Documents
Syed Hassanuzzaman
AVP, Credit Division,
Head Office, Trust Bank Limited
Syndicated loan
A syndicated loan is one that is provided by a group of lenders (called a syndicate) who work
together to provide funds for a single borrower and is structured, arranged, and administered by
one or several commercial or investment banks known as arrangers. The borrower could be a
corporation, a large project, or a 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 .
Typically, 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.
Syndicate members play different ro les. Some just lend money. Others also facilitate the process.
It is common to speak of an arranger, lead bank or lead lender that originates the loan, forms
the syndicate and processes payments. But several syndicate members may share these tasks.
Pricing of the loan may be fixed or floating based on investor demand, market situation and risk
perception in the particular sector, as a standard feature of loan commitment letters. At the end of
the process, the arranger will total up the commitments. If the paper is vastly oversubscribed, the
arranger may slice the spread further. Conversely, if it is undersubscribed, then the arranger will
be forced to raise the spread to bring more money to the table.
Goal of Syndication:
Share of credit Risk: The main goal of syndicated lending is to spread the risk of a
borrower default across multiple lenders. Because syndicated loans tend to be much
larger than standard bank loans, the risk of even one b orrower 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.
Comply Regulatory Requirement : To comply central bank’s instruction where it has been
emphasized on loan syndication by more than one bank in case of large loan.
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In-depth Analysis: Analysis of the project is done by more than one lenders.
Joint Arranger /Co-Arranger: A group of mandated banks who will act jointly to raise the
fund from the syndicated market for th e borrower .
Facility Manager / Agent: A bank that acts in some capacity on behalf of another bank . The
Bank takes care of the administrative arrangements over the term of the loan (e.g.
disbursements, repayments, compliance) once the relevant documentati on has been executed.
A syndicate manager (Lead Bank) will receive a mandate from a borrower to arrange a
syndicated loan. After the agreement closes, the duties of the syndicate manager end. At that
point, the syndicate manager is usually appointed the agent bank, which coordinates the loan
between the borrower and participating banks.
Manager : A second tier underwriter or a bank committing to the seco nd level of participation;
Book Runner : The central task in the execution phase of the syndication.
The Bank appointed to run the books is responsible for issuing invitations, disseminat ing
information to interested banks and informing both the borrower and management group of daily
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progress. The role is very visible vis -à-vis the borrower and the general market. As such, it is
generally considered the most desirable task.
Note: Not all of these titles are available on all transactions. Other titles are sometimes offered,
such as Co-Lead Manager, if the size of a transaction justifies another level of commitment from
banks.
After analyzing all the relevant aspects of risks, Lead Arranger helps the borrower by
taking proper steps and will set a plan to raise the fund from the Banks / FIs to set up the
proposed project. A Time Schedule is prepared by the Lead Arranger to close the
syndication deal.
A Good professional arranger will always be able to add something to a borrower’s own
deliberations. It should be able to suggest amendments / value additions .
It is very important that the lead bank has an in -depth knowledge of the individual
borrower. This applies not only to the particular company but also to the wider
environment in which it works, the economic pressures, the competitive environment and
so on.
The Lead Bank/Arranger has the responsibility for much of the selling of the loan t o
participants.
The Lead Bank will be the first port of call for questions and needs to be able to answer
them authoritatively in order to head off problems and sensitivities before they arise. This
role will be particularly important with respect to synd icate members who do not know the
borrower particularly well.
Agency Role: Riding the boat throughout the tenure of the syndicated credit
Completion of all the documentation/mortgage formalities as per sanction terms and
conditions and Facility Agree ment and other syndication agreements; Agent will preserve
all security documents and will do all the administrative & monitoring activities during the
tenure of the loan. The functions start of Agent after post -Signing stage.
The agent bank’s role is to act as the agent for the banks (not for the borrower)
Send a copy of the set of all documents to the borrower and the participating banks
attested by the authorized signatory (person) of syndication unit of agent bank;
Distribution of participation fee t o all the participating banks by the lead arranger/agent on
pro-rata basis;
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Preparation of Investment Schedule of the project;
Arrange Site Visit Program time to time before starting Trial Production and Commercial
Production by the Lead Arranger/agent;
Obtain NOC from the participating banks / FIs, if there is any change in Means of Finance
/Project Cost or any change of terms & conditions of the Facility Agreement or other
syndicated documents;
Arrange review meeting with the borrower, participating banks and the Lead Arranger
time to time for exchanging views with each other regarding progress of the project and
to enhance the relationship with the Lenders and the Borrower. Minutes of the meeting to
be distributed to the borrower and participating banks/FIs in times.
Proper monitoring of the syndicated loan by the Lead Arranger/agent and provide any
information about progress or any other issue of the project;
Reconcile the outstanding amount with all the participating banks along with principal and
interest.
The activities of agent bank include the disbursement of fund from the syndicated
partners to the borrower, after satisfaction of relevant conditions precedent, and will cover
collection of installment and other charges essentially commitment fees, front -end fees,
interest and repayments of principal, from the borrower on behalf of the participati ng
banks.
The agent will also be responsible for transmitting any post -closing waivers or
amendments requested by the borrower and negotiating them with the syndicate banks.
The responsibilities and role of the agent in cases an event of default has occu rred
through serving notice to the syndicated lenders.
Inform the participating banks regarding progress of the project time to time as per clause
of facility agreement.
The Agent will send the audited / provisional financial statements regularly as per clause
of facility agreement.
The Agent will call a review meeting time to time, where the borrowers and the
representatives of the participating banks / lenders will be present.
If a member bank of the syndication fails to honor it obligations, the a gent bank usually
consult with the borrower in such circumstances and use its best efforts to find a willing
replacement bank or banks.
Collection of fees, interest and repayments of the principal from the borrower on behalf of
the banks.
Participating Lender
The credit process when evaluating a participation in a syndicated credit is principally the
same as the one a bank would use if it were providing the same loan on a bilateral basis.
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The credit parameters and structural features of a syndicated tra nsaction may be more
comprehensive than those for a bilateral facility as they must satisfy the minimum criteria
of a diverse group of banks in the market in order to be successful .
This is a multi-bank transaction with each bank acting on a several basi s, i.e. each bank
acts on its own without responsibility of other banks in the syndication
One of the advantages that banks enjoy when they join in a syndicated transaction is that
they automatically benefit from a common position with their partner banks .
The lenders in the syndication agree to participate in the credit facility on common terms
and conditions but not necessarily in equal amount.
To gather information regarding the status of the project from the agent;
Giving suggestion to the agent if required to overcome any problems faced in the
syndication deal during tenure of the loan.
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STAGES
1. Pre-mandate Phase: Before awarding a mandate, the prospective borrower may solicit
competitive bids from from a number of banks or may liaise with a single bank . During this phase,
the lead bank needs to identify the needs of the borrower and designs an appropriate loan
structure. After finalization of Term Sheet, Letter of Mandate obtained from the borrower.
2. Placing the Loan /Post-mandate Phase: During this phase, 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 participan t’s concern if any. Finally, facility
agreements are negotiated and finalized. It is concluded by a closing or signing ceremony.
3. Post Closure Phase : The agent now handles the day-to-day running of the loan facility .
Example:
Suppose a borrower needs 100 crore Taka for an investment project. He goes to a bank, bank
tells you that they cannot finance more than 10 crore Taka and so the borrower move to a new
lender. Here again he finds same difficulty. So now he has an option to take loan from multiple
lenders. In this case, the borrower has to deal with multiple lenders for single investment project.
Here borrower can use loan syndication facility. He needs to appoint one Arranger or lead
manager. This Bank place the syndicated loan to other banks and makes sure that syndication is
fully subscribed. A syndicated facility is a lending facility, defined by a single loan agreement, in
which several or many banks can participate.
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. So what should he do? Even lender doesn’t want to miss this
opportunity. They can simply use loan syndication facility.
By this approach borrower gets desired amount without dealing with multiple lenders while
lenders do not miss a profitable loan proposal due to low exposure limit and minimize their risk.
The standard theory for why banks join forces in a syndicate is risk diversification. The banks in
the syndicate share the risk of large, indivisible investment projects. Syndicates may also arise
because additional syndicate members provide informative opinions of investment projects or
additional expertise after the funding has been extended.
•Deals with a single bank: As sta ted 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.
•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.
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•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.
•In case the borrower runs into difficulties, participant banks have equal treatment.
Benefits of loan syndications for borrowers Syndicated loans provide bo rrowers with a more
complete menu of financing options. In effect, the syndication market completes a continu um
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.
Letter of Mandate
Letter of Mandate is the authority to act in the marketplace as Arranger (referred to as the
Mandated Lead Arranger (MLA) on behalf of the borrower. The approach to the market is based
upon terms and conditions that have be en agreed between the arranger and borrower. As such,
the mandated bank is responsible to the borrower for the success of the syndication deal.
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Information Memorandum (IM)
A document prepared in connection with a proposed credit facility containing deta ils of the
borrower, its business and financial condition, and a description of the proposed transactions. IM
typically include an executive summary, investment considerations, a list of terms and conditions,
an industry overview, and a financial model.
Contents of IM
i. Circulating Page (Cover Page of IM); (includes a indistinguishable, colored,
meaningful and attractive)
ii. Disclaimer (Second Page of IM )
iii. Contact Persons;
iv. Table of context (Section wise with page No.)
v. Executive Summary -- description of the issuer, an overview of the transaction and
rationale, sources and uses, and key statistics on the financials.
vi. Management of the Company
vii. Market Aspect;
viii. Technical aspect;
ix. Financial of the Company;
x. Projected financials -- detailed model including sensitivity analysis in high, low, and
base case.
xi. Group performance of the Company;
xii. Performance of the supplier of equipment;
xiii. Risks and Mitigates;
xiv. Collateral package
xv. Exit strategies including second ways out via asset sales
xvi. CIB Report (Contents);
xvii. Industry overview -- description of the company’s industry and competitive position
relative to its industry peers.
xviii. Representation & warranties;
xix. Any other section may be included which dep ends on the nature of project &
Products.
Arranging Road show (Arranger organized the meeting which provide the borrower an
opportunity to the deal itself).
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Banks Review Facility Agreement;
Negotiate Facility Agreement with borrower;
Final Draft Facility Agreement from Legal Counsel;
Syndicated Lenders review Facility Agreement & other security documents;
Negotiate Facility Agreement with Lenders;
Select Signing Venue;
Print and execution copies of Facility Agreement and other documents;
Arrange signing ceremony;
Signing/Closing;
(i) For borrowing of Term Loan (or others…..) under syndication maximum
BDT……. Under the terms and conditions of his FA and the other loan
documents
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(ii) for the execution of the Loan and Security Documents; and
(iii) for authorizing such person(s) to execute the Loan and Security Documents;
and
F. Security Documents duly executed and perfec ted (except for a fixed charge of the machinery
to be imported by the borrower for the project);
G. Undertaking duly executed by the borrower to execute and perfect a hypothecation by way of
fixed charge over the imported plant and machinery as soon as they are acquired by the
borrower;
H. A certification from the borrower that no Event of Default has occurred or threatened to occur
and the representation and warranties made hereunder are fully effective;
I. Evidence that arrangement fees (or other syndication fees) have been paid to the Arranger;
J. Legal Opinion from the Legal Counsel of the borrower;
K. Evidence of arrangement of adequate gas supply or other principal requirements for the
project from the appropriate authority;
L.Opening of Escrow Account (EA) and Debt Service Reserve Account (DSRA) according to the
Escrow Account Agreement with the Escrow Ban k Agreement;
M. Payment of all dues, charges, fees including legal and other fees payable for preparation and
finalization of all loan and security documents and other related works
N.Each drawdown subsequent to the first drawdown under the facility Agre ement subject to:
Drawdown of Facility:
Compliances of CP
No event of default
Accuracy of representations and warrants
Drawdown Notice signed by authorized person of the borrower along with copies
of relevant documents
Date of disbursement including time;
Details of advance (amount and others);
Time maintain of Drawdown Notice (business days)
Equity Injection as per schedule or clause described in FA;
Others…..
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The purchaser pays less than par value for zero coupons and receives par value at
maturity. The difference in these two amounts generate s an effective interest rate or rate
of return.
Preference Share
Preferred Stock is a type of stock that promises a (usually) fixed dividend, but at the discretion of
the board of directors.
Preferred Stock has preference over common stock in the paymen t of dividends and claims on
assets.
An equity security with an intermediate claim between the bond holders and stock holders on
a firm's assets and earnings
Preference shares are a special class of share, which pay a fixed rate of interest .
Preference shareholders benefit because they are paid first.
Junk Bonds
A high-risk, high-yield (often unsecured) bond rated below investment grade.
Junk Bonds are high yield bonds issued by companies that are considered highly
speculative because of risk of def ault. Due to their higher risk level, most investors should
avoid junk bonds.
Debt instrument secured by a mortgagor a pool of mortgages (but not conveying a right
of ownership to the underlying mortgage). Unlike unsecured securities, they are
considered 'investment grade,' and are paid out of the income generated by principle and
interest payments on the underlying mortgage. It is a type of mortgage derivative. Also
called mortgage backed certificate .
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