A bank loan syndicate is when more than one bank comes forward to give loan to a particular borrower. Generally, the loan amount is huge and therefore, the pooling in of banks becomes essential. The documentation and formalities involved in this process is same as the normal loan procedure.
Why loan syndicate is required?
The syndicate loan came into being because certain loan amounts which the borrowers wanted from banks surpassed the limit of the lender’s capacity. It becomes much easier and risk free for multiple banks to sanction small loans which in turn becomes a huge amount for the borrower.
What are the advantages of loan syndication?
- Reduced risk for individual lenders: the risk is divided among all the loan givers and one institution does not have to bear the risk of losing money.
- Simple process to find lenders: the borrower invites bids for syndication. Borrower mentions the required fund, currency and period of loan, etc. Then one bank takes up the responsibility to syndicate the loan by arranging for co lenders. This way, the borrower does not have to find each lender.
- Chances of obtaining the loan higher for borrower: the lender arranges for the loan in either best-effort or underwriting. Both ways, the borrower is assured to get the loan.
- Faster payment and repayment process
- Certainty and flexibility: lenders can sell their portion to other interested lenders.
How many parties are involved in the loan syndicate?
Parties involved in a loan syndicate are:
- Borrower: an institution or individual who needs money and promises to repay them with an interest levied upon them.
- The arranger/lead manager: this is the bank arranges the syndicate and first to approve the loan. It charges arrangement fees and helps the borrower negotiate its terms with the syndicate.
- The co-arranger: when the arranger needs help in arranging the syndicate, it appoints co-arranger.
- Agent: this bank is responsible for looking after the paper work and day to day affairs of the loan. It is the job of the agent to see that all terms and conditions are maintained by the borrower. It has to monitor compliances with the provisions of the loan agreement.
- Security trustee: the trustee is essential in a secured loan, where he is made the in-charge of security and has to take necessary action in case of a default.
- Lending banks: the banks that have paid their share towards the loan.
What are the types of syndicate loans?
The types of syndicate loans are as follows:
- Underwritten deal: the arranger guarantees the complete loan and then syndicates the loan. It is much more risky as they are forced to absorb the difference or even incur loss. Arrangers approve underwritten loans for the following reasons. It acts a competitive tool to draw more customers. And secondly, because it charges a more lucrative service fees.
- Best-efforts syndicate: the lead arranger does not omit to the full loan. The unsubscribed portion of the loan is filled up by selling to investors.
- Club deal: used for a smaller loan amount. The feature of this type of syndicate is that all banks or investors share the loan equally or nearly equal.
What are the fees charged by banks for syndicate loans?
The basic fee on a loan is its interest rate. But a syndication system offers banks to charge fee for different purposes.
- Arrangement fee: paid to the arranger bank for structuring and syndicating the loan and for negotiating the documents.
- Underwriting fee: when arranger issues underwriting deal, it charges a fee.
- Participation fee: paid to all banks for joining the syndication.
- Commitment fee: when a bank arranges for the whole amount of the loan and the borrower fails to avail it, the bank has to lose its interest charges. So to avoid this, the bank charges a commitment fees which acts as compensation.
- Agent fee: the agent charges fees for its services.
- Management fee: the lead manager/ arranger who arrange and manage the whole syndicate charge this fee.
- Facility fee: the fees levied on commercial paper, letter of credit and facilities like underwriting and guarantee transactions.
What factors determine the rate of interest charged by syndicates?
The factors determining the rate of interest of syndicate loans are:
- Risk involved
- Credit rating of the country
- Life span of loan
- Credit rating of the borrower
- Turnover of the company
- Mode of repayment of loan
What is the process of syndicating a loan?
The process of syndication is explained in the following:
- Issuing mandate letter to the arranger/lead manager: a mandate letter is issued to the bank which agrees to arrange the loan for the borrower. After selection of the lead bank, it has to start appraisal process, design proper loan structure and make a persuasive credit proposal. The lead takes responsibility to find co-lenders and if it is unable to do so, it underwrites the amount (whole or partial).
- Execution of final legal documentation and disbursement of loan: the lead bank starts to sell the loan to prospective co lenders. The lead bank needs to prepare memorandum of information, term sheet, and legal documentation, approach banks and ask for participation. Any disputes regarding lending are solved. Syndication needs to be closed after signing. Loan is disbursed in parts as agreed in the agreement. A ‘no-lien’ account receives the loan money. The bank keeps an eye upon it to ensure the money is used only for the proposed purpose.
- Disbursement of loan on fulfilment of CPs: the borrower starts receiving loan amount only after the shareholder’s resolution approval of issues that may arise. Regulatory approvals mentioned as ‘conditions precedents’ are added to the agreement and these must be fulfilled before the disbursement of loan.
- Post closure state: monitoring and follow up stage. The security trustee is responsible for communication and processing of the loan. It is also his responsibility to take necessary steps in case of any default.
What documents are required?
For 1st stage
- Mandate letter- it is a commitment letter that the borrower sends to the arranger. It states the loan amount and the conditions the borrower is looking for to take the loan. It contains the following:
- Agreement to underwrite or best-effort the loan.
- Commitment amount, title of arranger and exclusive provisions.
- It also contains the obligations and duties of the lender.
- Also terms related to the syndicate or documents are included.
- Information memorandum- it is prepared by both the lender and borrower and is sent to the syndicating banks. Borrower’s business description and details of proposed facilities are given here. If loan being taken for a project, the details must also be provided. It is a confidential document.
- Term sheet- it contains terms related to the financing of the loan. All participating banks have to prepare their separate term sheet and attach it to the mandate letter.
For 2nd stage
Loan/facility agreement- detailed agreement of terms and conditions of facilities presented to the borrower. A sanction letter is also given to the borrower which contains the amount of loan, commitment, interest, repayment of loan, security charges, etc.