Syndicated Euro Credits

History of  Syndicated  Euro Credits

Syndicated Euro Credits are in existence  since the late 1960s. The first syndicate was  organized by Bankers Trust in an effort to  arrange a large credit for Austria. During  the early seventies, Euromarkets saw the  demand for Euro credits increasing from  non-traditional and hitherto untested  borrowers. The period after first oil crisis  was marked by a boom phase. To cope with  the increasing demand for funds, lenders  expanded their business without  undertaking due credit appraisal of their  clients or the countries thus financed.  Further, the European banks had short-term  deposits while bulk of borrowers required  long-term deposits. These landings were at  fixed rates thus exposing these banks to  interest rate risks. The banks evolved the  concept of lending funds for medium longterm  i.e. 7-15 years on a variable interest  rate basis linked to the  Interbank Rate  (LIBOR). Revision of rates would take  place every 3-6 months. These loans are  extended in currencies denominated by  US Dollar, Yen and Euro.  Amortization of the  loan would be by way of half-yearly  installments on completion of 2-3 years of  grace period. At present, this instrument on  a variable interest rate basis has emerged as  one of the most notable and popular  financing instruments in the international  financial markets. Syndicated Credit  remains as the simplest way for different  types of borrowers to raise forex finance.

Types of  Syndicated  Euro Credits

Syndicated Euro Credits are classified into two types –  club loans and syndicated loans.  The club loan is a private arrangement  between lending bank and a borrower.  Conventionally, the entry into Euromarkets  for a funding deal is well publicized.  When the loan amounts are small and  parties familiar with each other, lending  banks form a club and advance a loan.  Therefore, in view of this private  arrangement, an information memorandum  is not complied and neither is the deal  publicized in the financial press.  Syndicate credits are created when lenders  and borrowers come together and execute  an agreement, defying terms and conditions,  under which a loan can be advanced. These  procedures and practices have, over the  years, been developed and perfected so that  a standard package has evolved now.

Documentation Formalities

Along with the syndication process, the  lead manager/lead bank also initiates  action of drafting the loan documentation,  comprising an information memorandum  and loan agreement. The information  memorandum describes the borrowing  entity, its formation, ownership and  management. A somewhat detailed  account of operations, past and present,  and the cash flow position (along with a  summary of the financials) fund an  important place in it. It must be noted that  the information memorandum does not  have the same status and recognition as a  prospectus; neither does the lead manager  take any responsibility for its accuracy.  The information memorandum also contains a  detailed description of the guarantor, in case  loans carry a state guarantee. Many developing  country transactions carry the guarantee of  their respective governments and conventions  have evolved for describing the guarantor.  Since the information memorandum is  registered with any stock exchange, it does not  carry the weightage of a bond issue prospectus.  However, it is an important document from the  commercial point of view. Prospective lenders  rely upon the statements it carries and hence  due diligence must be observed.

The principal loan document is the loan  agreement and it is the responsibility of the lead  manager to draft and conclude it satisfactorily.  The agreement is signed by all  participating  banks and the borrower. It describes the basic  transaction, draw-down arrangements, interest  rate and its determination, commitment fees,  warranties and undertakings, default  circumstances, financial covenants (if any),  ‘agent bank’ and the participating banks. The  loan is underwritten by a  management group assembled by the lead bank.  Sometimes the lead bank itself underwrites  more than half of the loan amount.

Pricing  Methodology

The loan, will be charged at an interest rate  that is linked to the LIB OR. The rate will be  LIBOR plus the spread the bank would like to  maintain. This spread which may be any where  from 0.125 percent to 1.5 percent, may remain  constant over the life of the loan or may be  changed after a certain fixed number of years.  In addition, the lead manager’s fee, which will  be 0.125 percent of the loan, the commitment  fee of 0.5 percent on the un-drawn loan amount  and agent’s fee will be the total annual charges.  Front-end charges include participation fee for  the banks taking part in the loan and the  management fees for the underwriting banks  and lead banks. These loans will require a bank  guarantee and the bank should confirm to the  capital adequacy norms. However, there are no  other collateral’s attached.

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