Syndicated form of raising finance came into existence when the size of individual loans got bigger and banks thought fit to share the risks with other lenders. The concept of sole bankers was no longer feasible when a large amount of funding was involved. Moreover the syndicated mode of financing has two important features, namely, amount (risks) and administrative saving (documentation to be one principal lender). There will be one principal lender who will finance and the other participant lenders in the syndicate will share the risks in a predetermined share. Governments of countries as well as the corporate sector are tapped the syndicated loan route. The syndication is available for both, fund-based facilities as well as non-fund based facilities like Letters of Credit and Documentary Credits. As the syndicated loans are arranged a little quickly, these are popular with corporate entities. The fees payable on syndicated loans consist of management fees payable by the borrower on signing the loan documents or on first draw down, commitment fees payable, underutilized portion of the loan during the period when the loan was available and fees payable to the principle bank who has arranged for syndication to cover all their administrative expenses.
Parties to a syndicated loan agreement
- Lead Manager(s)/Arranger(s): Those who receive an authority from the borrower to form a syndicate for the required loan.
- Underwriters: These banks including the Leader will underwrite the total amount of the facility and will try to get banks to take up the entire share of loan including them but with no share or even major share.
- Co – Manager: They have to participate but with a lesser share than that of leader.
- Participants: All those banks/lenders who participate in the syndicated program, as well as the leader/underwriter would try to see that it is fully allocated.
Features of syndicated loan and its composition
- The borrower finalizes the amount and the currency of the loan required and invites offers from the banks to arrange for finance.
- Banks who give their quotes for interest rates, fees, etc and undertakes the responsibility of arranging syndication is normally called the lead Bank/Manager/Arranger.
- Borrower will examine the offers of the various banks and will choose the best available offer, which is best suited to its needs. After deciding or selecting the bank, the borrower gives authority to that bank which acts as the leader to arrange the loan.
- Then the borrower and the arranger bank will formulate a memorandum of information, giving financial and other details of the co-lender. This is the important document on the basis of which the Arranger will seek participation of other interested banks/ lenders.
- While seeking/inviting banks to participate in the syndication, the Arranger will have to give details of sharing of fees, securities, etc. and it is expected to share in the proportion of the share to be picked by members in the consortium. In case of any shortfall in the participation of lenders, then the such portion of loan is expected to be taken up by the leader of the syndicate.
- Once the entire tie-up is done and finalized, the borrower and lender finalize the loan agreement and the borrower executes the same.
Credit: International Trade-MGU MBA.