Loan Syndication : A Complete Overview

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 lender’s 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.

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.
5. The final stage involves monitoring through an escrow account. Escrow account is the account in which the borrower deposits its revenue. It is the role of the agent to ensure the repayment of the loans and the payment of statutory dues is done before making payments towards any third party. Also the agent is also responsible to manage operations of loan facility consistently.