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Syndicated Loan

A loan facility offered by a group of lenders to a large borrower

What is a Syndicated Loan?

A syndicated loan is offered by a group of lenders who work together to provide credit to a large borrower. The borrower can be a corporation, an individual project, or a government. Each lender in the syndicate contributes part of the loan amount, and they all share in the lending risk, while one of the lenders will act as the manager (arranging bank), which administers the loan on behalf of the other lenders in the syndicate. The syndicate may be a combination of various types of loans, each with different repayment terms that are agreed during negotiations between the lenders and the borrower.

 

Syndicated Loan

 

Loan syndication occurs when a single borrower requires a large loan ($1 million or more) that a single lender may be unable to provide, or when the loan is outside the scope of the lender’s risk exposure. The lenders then form a syndicate that allows them to spread the risk and shares in the financial opportunity that may be too large for their capital base. The liability of each lender is limited to their share of the total loan. The agreement for all syndicates is contained in one loan agreement.

 

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Participants in a Syndicated Loan

Those who participate in loan syndication may vary from one deal to another, but the typical participants include the following:

 

1. Arranging bank

The arranging bank is also known as the lead manager and is mandated by the borrower to organize the funding based on specific agreed terms of the loan. The bank must acquire other lending parties who are willing to participate in the lending syndicate and share the lending risks involved. The financial terms negotiated between the arranging bank and the borrower are contained in the term sheet.

The term sheet details the amount of the loan, repayment schedule, interest rate, duration of the loan and any other fees related to the loan. The arranging bank holds a large proportion of the loan and will be responsible for distributing cash flows among the other participating lenders.

 

2. Agent

The agent in a syndicated loan serves as a link between the borrower and the lenders and owes a contractual obligation to both the borrower and the lenders. The role of the agent to the lenders is to provide them with information that allows them to exercise their rights under the syndicated loan agreement. However, the agent has no fiduciary duty and is not required to advise the borrower or the lenders. The agent’s duty is mainly administrative.

 

3. Trustee

The trustee is responsible for holding the security over the assets of the borrower on behalf of the lenders. Syndicated loan structures avoid granting the security to the individual lenders separately since the practice would be costly to the syndicate. In the event of default, the trustee is responsible for enforcing the security under instructions by lenders. Therefore, the trustee only has a fiduciary duty to the lenders in the syndicate.

 

Advantages of a Syndicated Loan

The following are the main advantages of a syndicated loan:

 

1. Less time and effort involved

The borrower is not required to meet all the lenders in the syndicate to negotiate the terms of the loan. Rather, the borrower only needs to meet with the arranging bank to negotiate and agree on the terms of the loan. The arranger then does the bigger work of establishing the syndicate, bringing other lenders on board, and discussing the loan terms with them to know how much credit each lender will contribute.

 

2. Diversification of loan terms

Since the syndicated loan is contributed by multiple lenders, the loan can be in different types of loans and currencies. The varying loan types offer different types of interest such as fixed or floating interest rates, which makes it flexible for the borrower. Also, borrowing in different currencies protects the borrower from currency risks resulting from external factors such as inflation and government laws and policies.

 

3. Large amount

Loan syndication allows borrowers to borrow large amounts of loans in the long term to finance capital-intensive projects. A large corporation or government can borrow a huge loan to finance large equipment leasing, mergers, and financing transactions in telecommunications, petrochemical, mining, energy, transportation, etc.. A single lender would be unable to raise funds to finance such projects, and therefore, bringing several lenders to finance a single lender makes it easy to carry out such projects.

 

4. Positive reputation

The participation of multiple lenders to finance a borrower’s project is a reinforcement of the borrower’s good market image. Normally, lenders would be unwilling to lend to a borrower with poor credit history because it exposes them to higher lending risks. Borrowers that successfully paid syndicated loans in the past elicit a positive reputation among lenders, which makes it easy for them to access credit facilities from financial institutions in the future.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Debt Covenant
  • Junior Tranche
  • Letter of Commitment
  • Senior and Subordinated Debt

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