A syndicated loan is a facility of finance being offered by a pool of lenders. These pools of lenders are called syndicates who agree as a group to provide significant loans for single borrowers.
The large borrower can be a corporation, a joint venture for a particular project, or a sovereign government. Syndicate loans can be credit line or fixed amount of loan or mixture of both the two.
Some of the projects require very large funds and hence to spread risks, banks and financial institutions come together to provide funds for such projects.
Hence, syndicate loan offers the benefit to lenders to spread risk and together take part in the project that could be large for them as individual lenders. Generally, syndicate loans are offered at adjusted rates.
Example of Syndicated Loan
In 2012, GVK took a loan worth $2.1 billion to improve the infrastructure of Delhi Airport.
The loan was taken from various banks that included the combination of both private and public sector banks.
HDFC bank took the responsibility as lead underwriter. The lead underwriter handles the book of the loan-related aspects.
3 Participants in a Syndicated Loan
The participants in syndicate loan generally includes the following:
1) Arranging bank
In our example as above, HDFC bank is the lead manager or underwriter. This bank is mandated by the borrower to organize funding on the terms and conditions of the loan.
The lead bank conducts a market survey to see which other banks would be interested in making the lending along with them and up to what extent would they participate.
The term sheet is prepared which is negotiated between lead bank and the borrower containing all the particulars of loan agreement.
The term sheet consists of details regarding the amount of the loan, interest rate, duration of the loan, and any other aspects.
The agent serves as the link between borrower and all the participating bank. The agents provide both the parties all the information that would allow them to comply with terms and exercise their rights for syndicated loan.
Under no circumstances, the agent has any fiduciary duty and his role is only administrative in nature.
Trustee holds the security of assets on behalf of all the participating banks as lenders. Syndicated loans try to resist the idea of giving security to individual lenders as the practice could become costly.
Hence, in case of default, the trustee is responsible for enforcing security under instructions by lenders.
Why do Banks Syndicate Loans?
Syndicated loans are becoming popular in the current age. The businesses have been consolidating after the financial crisis and coronavirus would only accelerate it further.
Hence, this has become increasingly good for both the borrowers and the lenders. Participation in such loans also helps to raise the reputation of small and mid-level banks.
Further, the regulatory requirement that puts restriction on loans up to certain thresholds also emphasizes the need for a syndicated loan.
Hence, the lead banks are placed in a good position to dictate the terms of syndicated loans and help bring in various supporting managers in order to raise the business on the whole.
4 Benefits of a Syndicated Loan
The following are the primary advantages of a syndicated loan:
1) Low effort and time involved
The borrower does not need to meet all the participating lenders. The lead manager or bank or underwriter brings other participating banks to the table in the beginning and keeps them informed about all the matters through the agent during the loan.
The lead bank has the biggest task of bringing other lenders on the board and discuss the terms of how much each lender could contribute.
2) Diversification benefit
Syndicated loan is provided by various lenders. Hence, it can be structured differently. The risks are spread among the participating lenders.
The varying terms of the loan can be various types of interest as fixed or floating rates which makes it flexible for the borrower. Further, diversification provides protection from inflation, government laws, and policies, etc.
3) Huge amount
The borrowers need and the participating banks take the advantage of large ticket size loans.
The large loan is generally required to finance big purchase of equipment, mergers, and transactions to be financed in telecommunications, mining, energy, etc.
Individual lenders won’t be able to lend such a huge amount without coming in collaboration with other banks.
4) Building a good reputation
If several top lenders in the banking space come to lend to a particular borrower, the borrower builds good creditworthiness and enhances his reputation.
It makes the borrower to easily access the loan from financial institutions in the future.