loan syndication

Loan Syndication

Once the client company has decided about the project proposed to be undertaken, the next step is looking for the sources wherefrom the funds could be procured to implement the project .

Merchant banker has to locate the sources of funds and comply the formalities required to procure the funds .

This service rendered by the merchant banker in arranging and procuring credit from financial institutions, banks and other lending and investment organizations for financing the clients‘ project cost or meeting working capital requirement is referred to as loan syndication or credit syndication.

INTRODUCTION

Loan Syndication refers to assistance rendered by merchant banks: to get mainly term loans for projects from a single development finance institution or a syndicate or consortium. Merchant banks provide assistance to corporate clients tor aise syndicate loans from commercial banks.

Meaning

Loan syndication in case of domestic borrowings is with the institutional lenders and banks.

Long and medium term funds are obtained from the1. All India Financial

Institutions like IFCI,IDBI etc.,

2. state level financial bodies like SFC, SIDC etc.,

3. commercial banks,4. mutual funds etc.

Short term requirements or working capital needs can be from:1. Internal sources like

internal accruals from working or operations and short term loans from friends and relatives;

2. External sources like short term borrowings from banks etc.

Long & Medium Term Loans

Small Term Loan

Loan Syndication (Domestic borrowing)

Since 1948, Development Finance Institutions (DFIs) or development banks with:1. Industrial Finance Corporation of India2. State Finance Corporations assist the

promotion and financing of term loans of industrial units .

DFIs have been the integral part of the capital market and

have played significant role in financing the investment

activity . These institutions:3. Provide credit and other facilities for

development of industries.4. Provide term loans in Indian and foreign

currencies

Organization in India Involved in Loan Syndication

All Indian Financial Institution

State Level Institution

All Indian Development Banks

Investment Institution

Specialized Financial Institution

State Financial Corporation (SFCs)

Small Industrial Development Bank of India (SIDBI)

IDBI

IIBI

IVCF

ICICI Venture

TFCI

LIC

UTI

GIC

IFCI

ICICI

SIDBI

Financial Institution

• Identify Financial Institution for borrowing

Merchant Banks help the clients to approach the financial institution for term loanIdentification of financial institution depends upon :1. Nature of industry2. Location of unit 3. Size of project cost

Project may be financed by one or more institutions dependingon the size of loan.

General Consideration By Merchant Bank :

1. Determine the amount of loan to be raised.

2. Adherence to the guidelines for financing of industrial projects.

Priority in financing is given to:Projects contributing to infrastructural and rural development.Project significantly contributing to infrastructural facilities in centrally declared backward areas, project located in backward areas etc.Project related to negative lists should be avoided.

• Appraising the term loan

After verification , a preliminary meeting should be fixed with the financial institutions.Loan Application:1. Promoter’s Background, technical skills, relevant experience and financial soundness.2. Market research study3. Aspects on technical, financial, and economic appraisal4. Cash flow statement for seven to ten-year period5. The land for project, plans for building and quotations for the machinery from twomanufacturers6. Actual production process has to be depicted7. Working capital requirementsMemorandum of association Article of Association Certificate of incorporation Latest annual report and statement of accounts if any

• Preliminary Meeting

• Debt-Equity Ratio/ Debt Service Coverage Ratio

Dept-equity ration: Large and medium firms(2.1) Small firm(3.2)Debt service coverage ratio: 1.6 to 2 times

• Security MarginSecurity margin represents the excess value of fixed asset over the term loan . The term loan is 75 percent of the value of fixed assets. The security margin is 25 percent.

• Payment of stamp duty and feesStamp duty and registration fees have to be paid.Subscribed and paid-up capital to be brought in by the promoters.• Disbursement

Disbursement of loan is made on the basis of assets created at site.Balance after the security margin is paid by the DFI.

Actors:

Borrower Arranger / Lead Bank

Participants

Documents :

Mandate Letter Placement Memorandum

Syndicate Document

Loan Syndication Process

Pre-Mandate Stage

Post-Mandate Stage

Borrower

Borrower

Banks

Participants

Arranger / Lead Bank

1

2

3 4 5

7 7


6

1.The borrower solicits competitive offers to arrange and manage the syndication with one or more banks, usually , its main banks.

2.From the proposals it receives, the borrower chooses one or more arrangers that are mandated to from a syndicate and negotiates a preliminary loan agreement.

Pre-mandated stage

Post-mandated stage

3. Once the lead bank/ syndicator receives the mandate from the borrower, a placement memorandum is prepared by the lead bank.

4. The loan is then marketed to other banks who may be interested in taking up the shares.


5. On the basis of the data in the placement memorandum, banks make a

reasonable appraisal of the credit before deciding about their participationin the loan.

6.Once the bank decides to become a member of the syndicate, it indicates the amount and the price it is likely to charge on the loan.

7.Based on the information received from all participating banks, the lead bank prepares a common document to be signed by all the members of the syndicate and the borrowing company.

Post- signed stage

When the deal becomes active and the loan is operational, binding the borrower and the syndicate members by the debt contract.


Borrowers Investors Arrangers

• Reduction in total borrowing cost• Wider diversity in funding sources• Greater efficiency and flexibility in financing

• Wider diversity and opportunity in asset holding• Dispersal of loan portfolio risk

• Greater flexibility in dispersal • Optimization of risk and return• Streamlining balance sheet• New sources of fee earning.

Improvement in operating environment

Effect for all participants Clear

understanding Of the necessity of debt IR

Benefits of Loan Syndication

Four Indian Banks , including State Bank of India and IDBI Bank , figure amongst the top five bank sin the Asia Pacific region for arranging syndicated loans in 2010 . Amongst Asia-Pacific countries ,Indian entities have be enmost active in raising funds mostly from infrastructure projects in the power and airports segments . Small amounts were raised for creating industrial capacities by corporates ,´SBI, the country largest lender ,with a mandate for five deals raised $1.58 billion followed by IDBI Bank ($1.41 billion in three deals ) , Axis bank ($980 million) and ICICI Bank ( $686 million)

News Report

• Union Bank of India, Bank of India, Allahabad Bank, Corporation Bank , UCO, United Bank of India are among the banks entering this space. Traditional players will now have to chase customers given the increase in competition.

• State-owned banks such asUnion Bank of India, Bank of India, Allahabad Bank , Corporation Bank , UCO , United Bank of India are gradually making inroads into this domain

• The prospect of earning an attractive fee income by leveraging their corporate relationships is luring banks to set up loan syndication desks.

Conclusion