Key Points
- Syndicated loan is offered by a group of lenders.
- Usually, large project use syndicate loan.
- Only one Sanction letter is used here.
- Interest or profit is shared among lenders as per agreement
What is Syndicate Loan?
Syndicated Facility is offered by a group of lenders to a single borrower when the loan amount is larger than the normal range.
The group of lenders sanction the loan amount on the same loan agreement i.e. Only one sanction letter uses for disbursing the loan amount. The lead arranger offers to other banks for their participation in the syndication process. Usually syndicate loan offers when the loan amount is larger for the single bank or lender. The common advantage of syndicate loan is that it allows to spread the risk among other banks. The interest rate would be fixed or floating.
Features of Syndicate Loan
- Loan size is larger than any other finance and uses for new projects, large equipment procures.
- Less time and effort for financing. Lead Arranger is responsible for doing the preparation of work of establishing the syndicate after the borrower and the arranger have agreed on loan terms by negotiation. At the implementation stage of the loan, the borrower does not need to face all members of the syndicate, and withdrawal, repayment of principal with interest and other management work related to the loans shall be fulfilled by the agency bank.
- Syndicated Loan may be given in various forms such as fixed-term loans, revolving loans, standby L/C line on requirements of the borrower. Meanwhile, the borrower can also choose RMB, USD, EUR, GBP, and other currency or currency portfolio, if needed.
- It can help borrowers establish a good market image. Successful establishment of the syndicate comes from the participants’ full recognition of the borrower’s financial and operational performance, by which the borrower can build up their reputation.
Participants of Syndicate Loan
The participants in syndicated loan are usually international banks of a wide variety of countries. Sometimes a borrower may include a lender in his preference list due to personal relationships. The Lead Manager may also include certain institutions as a result of its own business relationships, particularly reciprocity. Besides the lead manager, other syndication members include the co-manager banks, participating banks and the agent bank which are enumerated as follow:
- Lead Manager, or Lead Bank, or Lead Arranger: Lead arranger is the bank who is responsible for arranging the loan. The lead arranger is responsible for the total negotiation like structure, interest rate and other terms of the facility with the borrower. Lead Bank also organizes the participating bank, manages and supervises the preparation of loan documentation.
- Co-Managers: Lead arranger handles most of aspects of the loan and Co-manager will decide who should participate in the syndication process, to determine fees to be charged to the borrower, time table of certain events to be accomplished, determining the expenses and listing the legal documentation.
- Participating Bank: Participating Bank participates in the syndication loan process. The rate of interest usually set with the negotiation of Lead Bank.
- Agent Bank: The Agent Bank acts as the agent of Lenders, not for the borrower. Its main duty is to act as conduit in the channeling payments to and from the borrower. When the borrower repays the capital, it only pays one sum to the Agent Bank and the Agent Bank distributes it to the lenders according their participation. Point to be noted that some times the agent Bank and the lead bank would be the same person.
Contents of Syndicate Loan
Currency: Multiple currencies can be used in a single syndicated loan on demand of the borrower.
Loan Term: Three to five years (3-5) for short term loan, Seven to Ten (7-10) years for medium term loan and Ten to twenty (10-20) years for long term.
Interest Rate: The price of the syndicated loan is composed of loan and fees. The lending interest rate is set according the interest policies of the banks.
Charges: Charges may includes arrangement fees, underwriting fees, agency fees, a commitment fees etc.
Customers of Syndicate Loan
- Borrowers who require long-term and large-amount loan.
- Borrowers with high reputation in the industry, whose operation ability as well as financial and technical strength are recognized by most banks.
Conclusion
Syndicated loans are usually too large for a single lender to handle. The lenders of the Syndicated loan are composed of Big banks. But Financial institutions like mutual funds and the insurance company may also participate in this type of lending.