Syndicated Loan – Meaning
A syndicated loan is an essential source of debt financing for corporate. It is availed from a group of lenders. Lenders include commercial banks, Government Funding Institutions, International banks and Non-banking Finance Companies (NBFCs), etc. They constitute a ‘Syndicate’ to offer a loan facility. Syndicated loans provide funding for large-scale, capital-intensive projects. It is an important source of project financing—for instance, infrastructure projects, oil and gas projects, manufacturing projects, etc. Moreover, banks also participate in this loan syndication transaction to ensure risk mitigation and large exposure.
Parties Involved in a Syndicated Loan Transaction
- Borrower – Requirement of capital for expansion project or acquisition transaction. The borrower is responsible for the loan and interest repayment.
- Investment Bankers – Act as a facilitator in the loan transaction.
- Lead Bank – Responsible for structuring the loan transaction.
- Participating Banks – Lend some % of the total loan amount.
Appointment of Investment Bankers
Several investment banks serve as lead arrangers to arrange such types of loans. The investment bankers arrange a loan facility for a corporate that requires capital. Thus, the investment bankers get their fee as a certain % of the amount of loan arranged. The fee charged depends upon parameters such as the intricacy of the transaction, borrower’s credit rating, existing loan, borrowers’ financial strength, etc.
- Syndicated Loan – Meaning
- Parties Involved in a Syndicated Loan Transaction
- Syndication Process
- Benefits of Syndicated Loans
Preparation of Detailed Documents
Investment Bankers study the documents of the borrower. Thereby, prepare the required detailed project report in a particular format. After which, they submit a request for credit to financial institutions.
- Company Profile along with financial data.
- Project techno-economic feasibility study.
- Project cost estimates, revenue projections, profitability estimates, and cash-flow projections.
- Collateral security and guarantees provided.
- Legal documents of the company like Memorandum of Association and Registration Certificate.
- Directors’ details and their credit score.
Approaching Different Banks
Investment Bankers then approach different banks for participation in the loan syndication transaction. Subsequently, each bank informs its respective commitment to the loan transaction. The bank with the highest exposure is called a ‘Lead Bank.’
The lead bank stipulates the terms and conditions of the sanctioned loan in a document. This document is known as a ‘Term Sheet.’ The Term Sheet contains details such as the amount of loan, the rate of interest, collateral, repayment schedule, and special terms, if any. Investment Bankers negotiate with the terms, thus, ensuring easy approval of credit facilities.
Document Circulation and Execution
- Once the syndicate has given its commitment, the Loan Documentation is circulated amongst the banks for review and execution subsequently.
- The investment bankers work till the sanction and disbursement of these credit facilities. Further, they assist in the execution of documentation such as Stamp Duty payment, filing documents with the Registrar of Companies (ROC), Ministry of Corporate Affairs (MCA), etc.
- The document execution depends on the type of asset used as collateral security. The collateral is shared on a pari-passu basis, whereby each lender is ranked as per their contribution.
Fulfillment of the Conditions of the Loan
- After execution of Loan documentation, the Borrower has to fulfill the conditions stipulated in the Loan Agreement. Post which, the disbursement of the loan takes place.
- There can be conditions subsequent to the Agreements. The Borrower has to fulfill these conditions after disbursement of the facility.
- Usually, bankers appoint a security trustee in syndicate financing transactions. The security documents are held in the custody of the security trustee.
- The security trustee acts on the directions of the syndicate lenders for security enforcement.
- Upon loan disbursement, the Investment Bankers receive a certain % of the amount of loan arranged as their transaction fee.
- An individual lender cannot take enforcement action in any syndicated loan transaction. It requires majority votes from other lenders as well.
- The liabilities of all the lenders are independent of each other in legal terms.
In November 2017, YES Bank has raised US$ 250 million from Taiwanese banks. It has also raised US$ 150 million from Japanese banks. In 2018, it has raised US$ 300 million in syndicated loan facilities from eight banks. These banks are – Bayerische Landesbank, Commerzbank, CTBC Bank, First Abu Dhabi Bank PJSC, Korea Development Bank, State Bank of India, United Overseas Bank, and Westpac Banking Corporation. The YES bank has tied up a three-year loan facility in this syndication. A group of Lead Arrangers and Book-runners act as underwriters for the loan facility.
Benefits of Syndicated Loans
- The total cost of borrowing is less.
- Funding from multiple sources.
- New banking relationships.
- Ease of documentation.
- Flexible terms and conditions.
- Diversified customer base.
- Risk allocation among different companies.
- Optimize risk and returns.
- Limits exposure to a particular corporate group.
- Develop a new customer base.