Loan syndication is a potent source of funding for business organizations and also an important revenue earner for banks. You could imagine what could become of business organizations without lump sum loans to expand their businesses for a higher profit. So, a lender who can’t risk lending an enormous loan amount can share it with other lenders (syndication). Therefore, this is one reason there is loan syndication.
As you read along, you’ll understand loan syndication, its agent and more.
What Is Loan Syndication?
Enlisting a variety of lenders in funding various portions of a loan for a single borrower is what they call loan syndication. When a borrower seeks a loan amount that is too high for a single lender to provide, or when the loan is outside the boundaries of a lender’s risk exposure thresholds, loan syndication is most common. Because of this, they form a syndicate of lenders to give the money to the borrower.
Understanding Loan Syndication
In corporate finance, they commonly use loan syndication. They use corporate loans for several businesses, including mergers, acquisitions, buyouts, and other capital expenditure initiatives. These types of capital projects sometimes cause enormous sums of money, which are typically beyond the resources or underwriting ability of a single lender.
Because they share the risks with several lenders, loan syndication allows any one lender to issue a large loan. While keeping a more responsible and controllable credit exposure. It restricts the obligation of each lender to their proportionate part of the loan interest. Except for collateral requirements, most terms are the same between lenders. For each lender, they usually assign collateral assignments to distinct assets of the borrower. Typically, a single loan arrangement covers the entire syndicate.
To avoid misunderstandings and enforce contractual responsibilities, lending parties and loan beneficiaries’ a corporate risk manager frequently supervises the agreements. The primary lender performs most due diligence, although insufficient oversight can increase company costs. A company’s legal counsel may also enforce loan agreements and lender requirements.
LSTA is the acronym for The Loan Syndications and Trading Association. It is a well-established organization that aims to give resources on loan syndications to the corporate loan market. It facilitates the gathering of loan market participants, conducts market research, and takes part in the development of compliance procedures and industry laws.
Loan Syndicate Agent
In most loan syndications, a lead financial institution coordinates the transaction. The syndicate agent is the name given to the major financial institution. This agent is frequently in charge of the original transaction, fees, compliance reports, loan repayments during the life of the loan, loan monitoring, and overall reporting for all lending parties.
To assist with various parts of reporting and monitoring, they may hire a third party or additional specialists at various points. And this is usually during the loan syndication or repayment process. Because of the extensive reporting and coordination it requires completing and maintain loan processing, loan syndications frequently charge significant fees. Fees might amount to 10% of the loan balance.
Case Study of a Loan Syndication
Company XY wants to purchase an airport the owners abandoned and convert it into a large development. Which includes a sports stadium, multiple apartment complexes, and a mall. It is looking for a loan in the size of GH₵1 billion.
Company XY heads to VinFinance to discuss getting a loan, which VinFinance agrees to, but because the loan is such a gigantic size and greater than VinFinance’s risk tolerance. Therefore, the bank forms a loan syndicate to provide the loan to Company XY.
VinFinance acts as the lead agent on the syndicated loan, bringing together other banks to take part. It contracts the Bank of Ghana, Absa, CalBank, and UBA banks to take part in the loan. VinFinance contributes GH₵300 million to the loan, and they share the remaining GH₵700 million between the remaining members of the syndicate. Bank of Ghana lends out GH₵200 million, Absa GH₵100 million, CalBank GH₵250 million, and UBA GH₵150 million.
In loan syndication, they do not require the borrower to deal with different banks. Because of this, the management of loans becomes more efficient. After negotiation of terms and conditions with the borrower, the arranger handles syndicate formation. They only require the borrower to deal with the facility agent in favour of all lenders regarding drawdown and repayment. Besides that, loan syndication has a high flexibility in structure and currency. So, with this information in your mind, you’d rather seek a lump sum loan with more management efficiency. That sounds cool, doesn’t it?