Syndicate Loan

UNIT-5
 Learning Outcomes

• List the features of Syndicated loans.

• Enumerate the benefits of syndicated loans to the
parties involved in syndicate loan process.
• Evaluate how syndicated loans are better than
bonds.
 Contents

• Loan syndication
• concept of loan syndication,
• issue involved in loan syndication,
• loan syndication process
 Web links

• https://www.bankbazaar.com/personal-loan/loan-
syndication.html
• https://www.wallstreetmojo.com/loan-syndication/
• https://corporatefinanceinstitute.com/resources/knowl
edge/finance/syndicated-loan/
• https://investinganswers.com/dictionary/l/loan-
syndication
 Syndicated Loan

• When a group of lenders collectively extend loan

to a single borrower, using a similar terms and
conditions, documentation etc administered by
common agent, it is called a syndicated loan.
 Features of Loan Syndication
• Amount involved in loan syndication is usually very large.
• No need for separate agreement between individual bank and
borrower
• Amount of loan disbursed by each bank is predefined
• In syndication group have to share the loss in proportion to
loan amount sanctioned
Advantages of Loan Syndication

• Financing takes less time and effort.

• The administration of the loan is Extremely Efficient.
• It is beneficial for borrowers to establish a good market image.
• Borrowers have flexibility in structure and pricing.
• The borrower need not go in each bank and also need not to
apply separate application to all of the banks.
• The purpose and time period of the loan is fixed.
• The system is simple.
 Disadvantages of Loan Syndication

• Time-consuming Process since negotiating with the bank can take

various days, thus loan syndication is a time-consuming process.
• Borrowers may also be adversely affected by syndicated loan
agreements.
• If the problem arises, it may be difficult for borrowers to satisfy all
banks at the same time.
• Managing the relationship between multiple parties is a difficult
task.
• If profitability fails then the smallest bank wants to withdraw their
capital.
 Parties to a syndicated loan
• Borrower
• Arranger
• Co-arranger
• Agent
• Security Trustee
• Co- lenders
• Decision making panel
 Learning Outcomes
• Enumerate the benefits of syndicated loans to the parties
involved in syndicate loan process.
• List the stages involved in loan syndication process.
• Evaluate the various types of syndicated loans.
 Parties Involved in a Syndicated Loan Transaction

• Borrower – Requirement of capital for expansion project or

acquisition transaction. The borrower is responsible for loan
and interest repayment
• Investment Bankers – Act as a facilitator in the loan
transaction.
• Lead Bank – Responsible for structuring the loan transaction.
• Participating Banks – Lend some % of the total loan amount.
Syndicated Loan
Benefits of Loan Syndication
Process of Syndicated Loan
 Process of Syndication
• Process of Syndication
• Need Assessment
• To appoint an arranger the borrower sends a Mandate letter (also called as a commitment) letter
to the arranger.
• The content of a Mandate letter is-
• 1)  An agreement to underwrite or use best efforts to arrange.
• 2)  Titles of arrangers, commitment amounts, exclusivity provisions.
• 3)  Duties of the lenders and conditions to their obligations.
• 4)  Syndication issues (including preparation of an information memorandum, presentations to
potential lenders, clear market provisions, market flex provisions and syndication strategy)
• 5)      Costs cover and indemnity clauses.
• Term Sheet
• Project details and estimated Capital requirements
 Process of Syndication

• Information Memorandum- prepared by both, the arranger and the borrower and
is sent to the potential syndicate members. The choice of sources of fund depends
upon–
• i)  Nature of the project.
• ii)   Estimation of the cost of the project.                      
• There are three types of sources of money–
• Short term finance
• Medium term finance
• Long term finance-
• Preparation of Loan  application
• Syndicated Loan Agreement
• loan agreement available to the borrower.
• Appraising Institute (who appraises the project)
• Sanction Letter
 Types of Loans
• 1) Term Loan
• It is a loan from a bank for a specific amount that has a specified repayment
schedule and a floating interest rate.
• Term loans almost always mature between one to 10 years.
• Repayment in this system could be at once at the end of the facility or in
installments.
• Once a term loan is paid back by the borrower, it cannot be re-drawn.
• 2)  Revolving Loan
• In this facility the borrower decides how often they want to withdraw and in
what time intervals.
• Unlike a term loan, this facility allows borrower to re-draw, re-pay or
drawdown the loan during the term of its facility.
• If a revolving loan made to re-finance another revolving loan and drawn by the
same borrower in the same currency which matures on the same date as the
drawing of the second revolving loan, is known as a “rollover loan”.
 Types of Loans
• 3)  Evergreen facility
• A loan that can be extended after-pre set periods. Like a five year loan facility
can be renewed and increased by further 5 years.
• 4) Back stop facility–
• This loan is designed to be drawn only as the last resort for e.g. in situations
like when a corporation is on verge of liquidation.
• It works as a back-up when other funding sources have failed.
• There is also a swing line facility, which gives the borrowers the “same day
money.”
• 5)  General facility
• Syndicated loan agreements could either be a term facility or may be revolving
facility or they can contain combination of both or several of each type.
 Different kinds of Fees for loans
• 1)      Arrangement
• 2)      Underwriting fee
• 3)      Participation fee        
• 4)      Commitment fee
• 5)      Facility fee
• 6)      Management fee
• 7)      Agent fee
 Types of Syndicated Loans
• Underwritten Deal
• Club Deal
• Best Efforts Syndication Deal
 Underwritten Deal

• The underwritten deal is one of the most widely available types of

syndicated loans in Europe.
• Under this arrangement, the lead agent or underwriter guarantees and
syndicates the entire loan.
• If the loan has not been fully subscribed, the lead agent can opt to
absorb the undersubscribed portion. Then, if market conditions are
bullish, the same lead agent can sell to other investors the
undersubscribed part of the loan that it has absorbed.
• However, if markets are bearish, the lead arranger may be forced to sell
any undersubscribed portion at a discount or simply consider the whole
thing as a loss.
• There are several reasons why a bank may decide to become the

underwriter. First, this type of loan can make a financial institution

look more competitive.

• Next, a syndicated debt could mean huge profits for the bank

because the risks involved in this type of loan can translate to

higher service fees. Lastly, underwritten deals now have floating

interest rates, thus the risks are no longer as high as debts with

fixed rates.
 CLUB DEAL
• This type of syndication usually entails a smaller amount,
typically between $25 and $150 million.

• The main feature that makes this type of syndicated loan

unique is the fact that the lead agent and other members of
a club deal consortium all share equal, or nearly equal,
parts of the fees earned from the loan facility.
 Best-Efforts Syndication Deal

• Of all the types of syndicated loans, the best-efforts

syndication is the most commonly used .
• Under this arrangement, the lead agent does not commit or
guarantee the entire amount of the loan. Any undersubscribed
portion of the loan will be filled up by taking advantage of the
changes in market conditions.
• However, if the loan continues to be undersubscribed, the
borrower may be forced to accept a lower loan amount or the
loan agreement is canceled entirely.