Loan Syndication - A Complete Overview

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Loan Syndication A Complete Overview
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Loan syndication refers to the process where
multiple lenders come together to fund various
portions of the loan asked by a single borrower.
The process is majorly done when the amount is
very large for a single lender or when the risk
exposure levels are quite high. Therefore,
multiple lenders form an association or syndicate
to fund the requested capital. The borrower can
be a corporate entity, government or an
individual project. In corporate financing, loan
syndication process is often used for diverse
business reasons like project financing,
mergers, acquisitions, buyouts, etc. where huge
amount of capital is required and is normally
outside the resource capacity of a single
lender. Each lenders liability/rights is only
limited to the amount of their share of the
total loan amount.   In the process of loan
syndication, one lender acts as a manager or
arranging bank on the behalf of other lenders
who administers the loan. The agreements between
the lenders and borrower require the services of
a corporate risk manager to enforce contractual
obligations and avoid misunderstandings. The
primary lender generally conducts major due
diligence (checking of historical financial
records and dictate assessment of credit
facilities) before entering into the syndication
process.
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Process of Loan Syndication
1. The process of loan syndication is initiated
by the borrower. In the first or pre
mandate stage the borrowers contact single lender
or invite competitive bids from multiple
lenders. Post this the borrower finalizes the
lead bank or arranging bank. 2. After the
leading bank is appointed, the arranger prepares
a document known as Information Memorandum.
This document features transaction terms,
investment considerations, executive
summary, industry overview, list of terms and
conditions,  financial structure, detailed
assessment, strengths and weaknesses and risk
litigation. 3. As soon as the above step is
completed, the arranger then sends out
invitations to other banks to participate in
the syndication.  Once the participating lenders
of the syndication are finalized,
confidentiality agreement is signed among the
participants. Post execution of the
confidentiality agreement, loan documentation is
sent to the banks for their review and
approval. 4. Once the loan documentation is
completed, loan contract is completed and the
loan amount is disbursed.
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Advantages of Loan Syndication
The process of loan syndication comes with
multiple benefits that are listed below   1.
Saves Time and Effort - The time and effort of
the borrower is not wasted as the arranger does
the major work in the syndication process. The
borrower meets the lead bank and the arranger
does the extensive work of bringing other lenders
on board, establishing the syndicate process,
creating documentation and managing the
execution. 2. Large Borrowings - The loan
syndication process facilitates funding of large
borrowings for capital intensive projects.
Government or corporate entities can avail
borrowings through this process for setting of
new projects, expansion of existing projects,
mergers, acquisitions, leasing and financing
transactions that require a huge amount of
money. 3. Heterogeneity of Loan Terms - Since
multiple lenders contribute to the loan amount,
loan can be structured in different types of
loans and securities. Offering diverse types of
fixed or floating interest rates for example can
provide flexibility to the borrower. Also the
borrower can avail the loan in different
currencies in order to be protected from various
currency risks.
Original Source Loan Syndication