Loan Syndication : A Complete Overview
April 01, 2021
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
- 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.
- 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.
- 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.
- Once the loan documentation is completed, loan contract is completed and the loan amount is disbursed.
- 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.
Advantages of Loan Syndication
The process of loan syndication comes with multiple benefits that are listed below:
- 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.
- 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.
- 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.
- Efficient Management - The lead bank takes care of the syndication process and carries out the process in most efficient manner. This results in professional management of funds within fixed time period. Also the agent is responsible to ensure the execution of the process and to make sure the completion of the process.
- Good Market Image - The fact that multiple lenders are funding the loan of the borrower creates a positive market image of the borrower. Also, borrowers that possess successful historic record of payment of syndicated loans create goodwill among lenders and makes availing of credit facilities a little easier for them.
- Competitive Rates - Since multiple lenders are involved, the borrower gets the best market rate among the lenders. The lead bank makes sure that thee loan to the borrower is provided at most competitive rates.
Any business should check for competitive players in market when looking for loan syndication. Resurgent India is a renowned brand with more than 30 years of experience in the industry and holds a successful past record for debt syndication. Being a leading investment bank, Resurgent provides competitive rates for debts across India. We provide proper financial solutions for loan syndication in Mumbai and Gurugram.