What Is A Syndicate

What Is a Syndicate Loan?

10 min read

A syndicate happens when two companies come together to share a large transaction. Have you ever wondered how large companies raise large amounts of money? Well, you’re not alone. This blog is about one important way in which large companies can raise these large sums and how they do it. For example, a car maker wants to build a new factory for 1,000,000,000 dollars. So, how do they do it? For starters, they could go to their bank. But, their bank might be reluctant to lend such an enormous sum. So, one solution is to persuade several banks, also known as a syndicate, to each lend part of the money.

In a nutshell, a syndicate is a loan provided by a group of lenders.

It is then structured, arranged, and administered by one or several commercial banks or investment banks.

Typically, the borrower requires a large sum of money and turns to multiple lenders to make it happen.

They need more than a person, company, or bank to make it happen.

Syndicate Loan

5-Second Takeaway

  • A syndicate is essentially a leveraged loan.
  • A leveraged loan is a commercial loan provided by a group of lenders.
  • It’s structured, arranged, and administered by one or several commercial or investment banks or arrangers. 
  • It’s then sold (or syndicated) to other banks or institutional investors.
  •  No separate agreement between an individual bank and the borrower
  • The length of the contract is generally between 3 to 15 years
  • Each bank is not necessarily to contribute an equal amount.

The Changing Landscape Of Loans

The past few decades have seen a drastic change in trading, investing, and the art of corporate loan syndication. Not too long ago, there was a time when banks kept any loans to corporations on their books. Letting those loans be traded by investors and kept in a portfolio was as foreign as living on Mars

In time, however, investors came knocking, drawn in by the attractive features of loan syndications. Unlike bonds, these loans were senior-secured debt obligations with a floating rate of return. Hence, a new institutional asset class emerged. 

Today, such loans are held by banks and typically sold to other banks, mutual funds, insurance companies, structured vehicles, pension funds, and hedge funds

Large Leveraged Buyout Syndicate Loan

Starting with the large leveraged buyout (LBO) loans of the mid-1980s, the leveraged/syndicated loan market has become the dominant way for corporate borrowers (issuers) to tap banks and other institutional capital providers for loans.

The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateral – one company, one lender – credit lines.

KKR’s $25 billion acquisition of RJR Nabisco was the first – and remains the most (in)famous – of the high-flying LBOs. Struck during the loan market’s formative days, the RJR deal relied on some $16.7 billion in loan debt.

Starting with the large leveraged buyout (LBO) loans of the mid-1980s, the leveraged/syndicated loan market has become the dominant way for corporate borrowers (issuers) to tap banks and other institutional capital providers for loans.

The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateral – one company, one lender – credit lines.

KKR’s $25 billion acquisition of RJR Nabisco was the first – and remains the most (in)famous – of the high-flying LBOs. Struck during the loan market’s formative days, the RJR deal relied on some $16.7 billion in loan debt.

How Big Are Syndicate Loans?

Enormous. In the U.S. alone, total corporate lending was approximately $2.9 trillion in 2021. What is the length of a loan syndicate? The length of the agreement is between 3 to 15 years.

Syndication loans or consortium loans are usually in huge amounts. This is because every bank limits the amount of credit exposure it can have to a person, a company, or a group of companies. Sometimes, a single bank cannot lend the whole finance requirement without breaching this criterion. So, a group of banks comes together to finance the project.

Once the loan issuer (borrower) picks an arranging bank(s) and settles on the deal structure, the syndication process moves to the next phase. The “retail” market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors such as mutual funds, structured finance vehicles, and hedge funds.

Who Is Involved In Loan Syndication?

1. The Arranging or “Lead” Bank

Participants in loan syndications include the arranging bank and the lead bank.

The arranger then establishes the syndicate, brings other lenders on board, and discusses the loan terms with them to determine how much credit each lender will contribute.

As a lead bank, they act as a syndicate manager and organize funding based on a specific term the loan parties have agreed to.

Therefore, the arranging bank must find other banks willing to participate in the syndicate by lending money and assuming risk.

The arranging bank plays a role in negotiating the details of the arrangement, providing credit information, and preparing loan documentation for the participating bank. 

Then there’s the underwriting bank…

2. The Underwriting Bank

Their role is to supply the remanding funds or the unsubscribed portions of the desired loan. Then, based on the situation, the arranging bank is the underwriting bank. Usually, a different bank manager underwrites the loan portion. So now we have the participating bank.

3. The Participating Bank

All banks that participate in loan syndication are known as participating banks. These banks also charge a fee like the lead bank for their participation.

4. The Agent Bank

The agent bank administers the term with profound accuracy. The Agent Bank is a link between the lender and the borrower and has a contractual obligation to both. The basic work of agent banks is to channel the funds from all participating banks to the borrower and channel back interest and principal amounts from the borrower to participating banks.

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Duration of a Syndicate Loan

A corporate loan is generally between 1 to 5 years because it involves a huge amount of money to be lent to the borrower.

The Risk Of Syndicate Loans

The risk of default can be high with syndicated loans, particularly in the case of leveraged buyouts or sovereign entities. If a huge amount is lent to a party, and for whatever reason, the loan becomes non-performing, it will have a huge bearing on the lender’s financials. Undoubtedly, this can impact their business. To share such business risks, two or more banks lend to a company/project/group and share the risk and reward in mutually agreed ratios.

Types Of Syndicate Loans

  • Underwritten Deal Best
  • Efforts Syndication
  • Club Des

Why Do Banks Syndicate Loans?

Because there is a lot of money in it, fees are the driving force behind banks doing more business.

Companies are willing to pay fees to access the investor clients of banks.

The business of corporate banking is to connect investors with corporate issuers of debt (and equities).

Often one loan is too large for any investor to justify investing the whole loan amount.

Therefore syndication allows multiple investors to share the loan.

Additionally, syndicate loans allow banks to diversify by lending to borrowers, regions, and industries to which they might otherwise have access.

It also helps them to diversify their portfolios. 

Advantages of a Syndicate Loans

Loan syndication, where a group of banks makes a loan jointly to a single borrower, offers several benefits. Syndicate Loans offer an amalgamation of effort and the opportunity to create new banking contacts.

Fidler and Neymeyer explained that lenders also prefer syndications, “…they permit the lenders to make more loans while limiting individual exposures and spreading their risk within portfolios more widely….” They further explained,“…Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants….”

Also, syndicated loans take less time. The borrower is not required to meet all the lenders in the syndicate to negotiate the loan terms. Rather, the borrower only needs to meet with the arranging bank to negotiate and agree on the loan terms. 

Disadvantages of Syndicated Loans

Despite these benefits, loan syndication could pose additional risks for the banking system,

  • Negotiating with a bank can be a time-consuming process. 
  • If problems arise, it may be difficult for borrowers to satisfy all banks simultaneously. 
  • Managing relationships can be hard. For example, if profitability fails, the smallest banks may want to withdraw their capital.

Legal Issues WIth Syndicate Loans

Such deals raise many interesting legal issues, typically involving players in different countries. The first of which is determining what legal system applies to the agreement. 

Let’s take a Norwegian company that wants to drill for oil in Indonesia. The syndicate might comprise banks in the US, France, Britain, Germany, and Japan while the contracts are negotiated and signed in London. 

How does one determine which particular legal system applies to the syndicate? For fun, let’s choose English law. But how do we know if the Norwegian company has a contractual capacity to enter into the contract? Do we assess this by English law or by Norwegian Company law?

What Powers Do the Lenders Have?

Further to that, the loans secured on the Indonesian oil wells. What powers do the lenders have with those assets in question? Are the powers determined by Indonesian, Norwegian, or English law?

Another problem is the nature of the relationship between the various parties. Hypothetically, let’s assume each of the five banks promises to lend 100,000,000 dollars. What if one bank can’t comply because it’s become insolvent and looks to the other banks to make the difference?

Final Thoughts: What Is a Syndicate?

Some other issues arise as syndicated loans often last for several years. The lenders need some reassurance about the continued financial health of the borrower. They need to know they can protect their investment if something goes wrong. 

One way to do this is to take security over the borrower’s assets. This would give the lenders the right to sell them, but that’s a drastic solution. Further to that, the security may not be as valuable as initially thought.

 It’s much better to prevent a crisis from happening as much as possible, but it’s not always straightforward in a syndicate. And surprisingly, for an area of law that involves trillions of dollars, there’s relatively little hard law and legislation surrounding syndicates. 

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