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Loan Syndication | Meaning, Features, Types, Procedure, Charges, Documentation, Advantages & Disadvantages

Loan Syndication


What is Loan Syndication ?


Meaning and Definition of Loan/Credit Syndication 


The loan syndication is the leading and conventional way of cross border lending. If there is requirement of large amount of loan then the different banks combines themselves to grant loan.

It is also known as credit syndication. It was evolved in U.S. by the law of U.S. which has defined a particular limit on lending facility of a single bank on a single borrower.

It is a contract between two or more banks or lending institutions to grant loan to the borrower on the same loan documents.

There is the single loan agreement of the syndicated loan provided by the banks which are known as participants to the borrower. The loan is controlled by an agent and an agent can also be participants. The participants give certain amount of loan and receive same amount of repayments. The organizing. of the loan is done by an arranger.

Also, the loan syndication is the type of joint venture whereas all the type of joint venture is not same like syndication. In simple words, a syndicated loan is the group of people which contribute money to buy a land or other property for attaining profit. They can be a person or an institution who is planner of the group. 

For example, there is syndicator when the person or entity assemble the deal together and then give chance to the other people and institutions to: contribute for achieving the development or acquisition.

The Loan Syndication Service is the project financial service given by the merchant banker int which financial service is planned and obtained from various financial institutions, banks or other lending institutions. It is done for arranging capital both for fixed capital and working capital. It is also known as 'Loan/Credit Syndication Service' as there is inclusion of various lending institutions for granting loan.

It is basically done when there, is requirement of large amount of loan, the syndication lets numerous lenders grant loan and also maintain the more reasonable and manageable credit options as they are the only creditor.

Participants in Loan Syndication 


The various participants in loan syndication as the following : 

1) Lead Bank : 
The lead bank is the bank which contribute the highest amount in the loan.

2) Managing Bank : 
The managing bank is selected by the borrower which require loan. The managing bank organise loan. It helps in filing loan application, it discusses the terms and conditions with other banks and organises the syndicate. After getting the signature from the borrower and participating banks the work of the managing bank is ended.

3) Agent Bank : 
The agent bank is the bank employed by the participating bank for safeguarding the interest after the lean agreement. is signed. They come after the managing bank.

4) Participating Bank : 
The bank which are participating are divided into two types. The types are as follows :
  • The wholesale large commercial banks which grants loan and takes the highest share.
  • The retail sector small bank which grants loan take any percentage of share as given to them.

Features of Loan Syndication


The features of loan syndication are as follows : 

1) Required for Large Amount of Loan : 
The loan syndication is only required for the large amount of loan. It cannot be used for small amount of loan as it can be given by the single bank.

2) No Separate Agreement Requirement : 
All the lending institutions involved in loan syndication: work on the single agreement. It does not require the separate agreement for all the lending institutions.

3) High Repute Borrowers : 
As the loan syndication is done for huge amount so the loan is granted only to the high reputed borrowers. There is basically the big corporate house as the borrower of loan syndication. It is done for long time period i.e. from 3 to 15 years.

4) Less Risk : 
There is less risk involved in loan syndication as if the borrowers is not able to pay the loan amount, than the single landing institutions will not bear all the loss/risk but instead all the bank in syndication group will share the loan according to the amount contributed by all the lending institutions.

Types of Loan Syndication


The various types of loan syndication's are as follows : 

1) Term Loan Facility : 
Term loan facility is the type of loan syndication in which the certain amount of capital is granted by the lending institution for certain time period as specified in the term loan facility. The repayment is done according to the Loan Market Association (LMA) in which the borrower pays either in installment or one payment at the end of time period. The term loan facility finishes as the loan is repaid. The single payment term is known as a bullet repayment.

2) Revolving Loan Facility : 
In the revolving loan facility, the borrowers will be capable of borrowing till the maximum amount of the syndicated loan is repaid and he can further withdraw the advanced capital at the time of converting term loan facility. It can also be resolved by extending the time period like from) two month to nine months. By the end of the time period, it is usually due for repayment but is refined as the "rollover loan".

3) Underwritten Transactions : 
It is also known as a 'Bought Deal' in this the overall amount of the facility is given to the borrower according to the pre-decided terms and conditions. The underwriting of the loan is carried out by an arranger which takes the overall risk and will be part of the syndicate process. It is required when there is short changing time period like at the time of acquisition. It helps the borrowers by providing the fast grant of loan and also saving the confidential and price-saving information. The borrowers are supposed to pay higher fee to the arranger than the normal fees. There is two or three joint arrangers if the amount of loan is high.

4) Arranged or Best Efforts Transactions : 
In this the arranger grant the loan for only some amount as possible and manages the leftover amount from the syndicate. It is helpful for borrowers who are sure that they will get the whole amount by the loan syndication and will also increase the banking relationship. The borrower is related with the market risk and it is not certain that all the amount will be granted as loan and has to pay the small amount as a fee to the arranger.

5) Club Deals : 
In the club deals, borrower does not appoint the arranger but by the help of its own relationship with the banks arranges for the loan syndication. The borrower act both as the arranger and agent for itself. The relationship with the bank of the borrower needs to be strong for getting finance for the project. There are different situation which bring different structure but they agreement with all the banks will remain the same.

Documentation for Loan Syndication


The documents required for loan syndication are as follows :

1) Mandate Letter : 
The appointment of Arranger is done by borrower through the help of mandate letter. It can also be known as Commitment letter. The matter of mandate letter changes. according to the Arranger if the Arranger will use it according to the best efforts" for arranging the required facility or is underwriting to the required facility. The provisions covered in the Mandate Letter are as follows :
  • The agreement telling it will underwrite of will use "best efforts to arrange". 
  • The titles of the arrangers, commitment amounts, exclusively provisions, etc. 
  • The requirement to the obligations of the lenders.
  • The various syndication issues comprise of an information memorandum, presentations to potential lenders, clear market provisions. market flex provisions and syndication plan.
  • The various costs and the indemnity clauses.

2) Term Sheet : 
The term sheet covers all the terms of the proposed finance before full documents. It will be attached to the mandate sheet. It gives the information about the parties involved, their work and other commercial terms like the type of facilities, the facility amounts, the pricing, the term of the loan and the covenant package.

3) Information Memorandum : 
Information Memorandum is made both by the borrower and the arranger. The information memorandum is prepared by the arranger and is sent to the potential syndicate members. The borrower gets the help of the arranger in making the information memorandum according to the information given in due diligence process. It includes the commercial description of the business of the borrower, management and accounts and also the information of the proposed loan given. It is not the public document so the confidential undertaking has to be sign by the potential leader for having details of all the documents.

4) Syndicated Loan Agreement : 
It gives information about the various terms and conditions on which loan is given to the borrower.

5) Fee Letters : 
It has the detail of all the fees paid by the borrower to the banks along with the interest paid on the loan and also other related bank expenses. The fees are paid to those banks which has syndicate or has performed additional work or has taken greater part in the loan process like the Arranger, the Agent and the Security Trustee. The detail of the fee is written in the separate side of the letters to maintain the secrecy. The loan agreement should be according. to these fee letters and also such fees are payable - for ensuring the non-payment by the borrower in case of default in the loan agreement.

Charges of Loan Syndication


The various fee charged for loan syndication are as follows :

1) Managing Fee : 
The managing fee is paid to managing bank who arranges the loan. The percentage of managing fee is decided according to the amount of the loan.

2) Participation Fee : 
The participation fee is paid to the participants of the syndicate and is the part of management fee given according to the amount contributed by them.

3) Commitment Fee : 
It is also known as facility fee and is charged on the undrawn balances of the loan. It helps in compensating the bank for keeping the funds ready.

4) Agency Fee : 
The agency fee is paid to the agent bank which is related to distribution of loan after the authorization, regaining the loan installments. and distribution of principal plus interest to the participants. It is charged annually.

Procedure of Loan Syndication


The process of loan syndication are as follows : 

1) First Step : 
In the first step, the borrowing company first investigate about the investment proposal and also the information about the financial plans and will attains the approval from the government. The approving of the financial plans is according to the certain parameters so that some flexibility is left the borrower.

2) Second Step : 
In the second step, the borrowers calls for quotations from various leading foreign banks and also major domestic banks for increasing the foreign financial plan. The borrower gives the instructions to the bank according to the quotations which has quoted the best overall terms. For example, the bank is State Bank of India.

3) Third Step : 
In this step, the State Bank of India makes placement memorandum which is the document for the investigation by the various banks which are related to the managing banks. The placement memorandum shows the details of the project for which the loan is required it shows the capability of the project, cash flows and other important information. The basic requirement of this memorandum is to receive the foreign investors which are related to the loan. proposal. The amount of loan is given by the various participating bank. This step is very important because the banks will be concerned about their funds and time.

4) Fourth Step : 
In this step, the syndicate group is made and all the important obligation are taken by the group members. The lead bank makes the necessary documents which are required and also get them signed by the officials of the company.

5) Fifth Step : 
In the last step, the funds is given to borrower according to mutually agreed terms and conditions.

Advantages of Loan Syndication


The advantages of loan syndication are as follows : 

1) Ways of Getting International Loan : 
By the help of loan syndication there are ways of getting the international loans which are very profitable for many banks and will help in increasing the earning of various banks like Citicorp, Bank of America and Manhattan.

2) Enhancement of Performance of Banks : 
By the help of loan syndication, the risk-return performance of various banks has enhanced as they can change their loans according to the types of customers.

3) Conveys Accurate Price : 
The loan syndication helps in conveying the accurate price for the business and also saves the time and work of the business in managing the bank individually.

4) Maintains Flexibility : 
It helps in maintaining the flexibility in structure and pricing. The borrowers have various option for selecting lending institutions for syndicated loan. The various options are multi currency options, risk management techniques

Disadvantages of Loan Syndication


The disadvantages of loan syndication are as follows : 

1) Time Consuming : 
It is time consuming process as there is numerous banks are involved and negotiating with them requires lots of time.

2) Lot of Financial Investment : 
There are several types of relationship which has to be maintained and this requires lot of financial investment.

3) Liberal Laws : 
The clause of the bank which requires more time for granting loan should be stricter in the agreement.

4) Involves Risk : 
If the loan syndication involves various international banks than it also involves huge amount of risk.

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