A syndicated credit is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.

The syndicated loan market is the dominant way for corporations in the U.S. and Europe to tap banks and other institutional financial capital providers for loans. The U.S. market originated with the large leveraged buyout loans of the mid-1980s,[1] and Europe's market blossomed with the launch of the euro in 1999.

At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowers—issuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins above the relevant LIBOR in the U.S. and UK, Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions.

In the U.S., corporate borrowers and private equity sponsors fairly even-handedly drive debt issuance. Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, who, in turn, determine many of the standards and practices of loan syndication.

1. Temporary association of two or more individuals or firms to carryout a specific business venture or project such as large scale real estate development. Syndicates are commonly treated as corporations or partnerships for tax purposes.2. Group of brokers or insurance underwriters who together accept the risk of buying and distributing a new stock issue or an insurance risk.

Syndicated loan is a loan provided by a group of lenders, usually commercial or investment banks.  Syndicated loan deals are typically structured and administered by a lead arranger that initially underwrites the transaction and guarantees the total commitment, and later subscribes a given amount of the commitment to other banks in the syndicate.

temporary association of investment bankers brought together for the purpose of selling securities; also called purchase group. One investment banker in the group, usually the originating house, is selected to manage the syndicate. There are two types of underwriting syndicates, divided and undivided. In a divided account, the liability of each member investment banker is limited in terms of participation. Once a member sells the securities assigned, that investment banker has no additional liability regardless of whether the other members are able to sell their portion of the security or not. In an undivided account, each member is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that investment banker has sold. Most syndicates are based on the undivided account arrangement.

syndicate

1. Banking. Project financing common in the Eurobond and Euronote markets, and also in the United States, whereby a group of commercial bankers and investment bankers each agrees to advance a portion of the funding. Typically, the financing is arranged by a single bank at narrow interest ratespreads above the lender's cost of funds. The syndicator acts as investment manager, collecting a loanorigination fee or commitment fee from the borrower, and arranging for the sale of Euronotes to other banks in the group. Typically, the syndicator keeps only a small portion of the total financing, generally less than 10% of the total value of the loan.The syndicated loan differs from a loan participation because the syndicate members are known at the outset to the borrower. Syndication also separates the lead banker from the group of financialinstitutions that ultimately fund the obligation. See also Note Issuance Facility ; Revolving Underwriting Facility ; tender panel .

2. Securities. A group of investment bankers who purchases a new offering of securities from an issuerfor resale to the investing public at a fixed price. Also called the purchase group or underwriting group.Operating rules of the investment syndicate, led by a managing underwriter , are spelled out in theagreement among underwriters . The purchase group, which may include commercial bankers, differs from the selling group .

3. Investments. The purchase of shares in investments promising tax avoidance, or reinvestment of earnings without paying income taxes, usually through limited partnership participations in real estate, oil and gas exploration, and so on, sold through an investment syndicate or a broker-dealer. The Tax Reform Act of 1986 sharply curtailed so-called passive losses in tax shelter investments.Dictionary of Marketing Terms

syndicate

1. sell or distribute a television program or series to one or more local stations. Syndicated programs include reruns of former network presentations, made-for-TV movies, and film presentations.

2. group of newspapers, such as the Hearst chain, owned or managed by the same person or company.

3. sell or distribute a newspaper supplement or feature column to a number of publications for release at the same time.

4. offer for sale the findings of a research company. Syndicated research services conduct research in the areas of consumer and product information, broadcast audience composition, magazine and newspaper readership, and product usage, and then sell their results to various clients on asubscription basis.

5. sell or distribute mailing lists . (Syndicated mailings are used by a company that will prepare letters, brochures, and pamphlets about its products and then turn over these materials to another company that specializes in mailing materials to prospects from its own prepared lists.)

6. sell or distribute artwork to advertisers, advertising agencies, or others who use artwork in their advertising; a syndicated art service.

Dictionary of Insurance Terms

syndicate

group of insurers or reinsurers involved in joint underwriting. Members typically take predetermined shares of premiums, losses, expenses, and profits. Syndicates, more common in reinsurance than in primary insurance , are formed to cover major risks that are beyond the capacity of a single underwriter.

group of individuals or companies who have formed a joint venture to undertake a project that the individuals would be unable or unwilling to pursue alone. A syndicate may be treated as a partnership or corporation for tax purposes.

syndicator

a person in business who sells an investment in shares or units.

Example: Collins, licensed as both a real estate broker and a securities salesperson, is a syndicator. She contracts with investors to buy shopping centers, then sells partnership interests conveying ownership in the centers to 30 different investors.

Dictionary of Business Terms

syndicator

person in business who sells an investment in shares or units.

See also syndicate

Related Terms:

syndicate

temporary association of investment bankers brought together for the purpose of selling securities; also called purchase group. One investment banker in the group, usually the originating house, is selected to manage the syndicate. There are two types of underwriting syndicates, divided and undivided. In a divided account, the liability of each member investment banker is limited in terms of participation. Once a member sells the securities assigned, that investment banker has no additional liability regardless of whether the other members are able to sell their portion of the security or not. In an undivided account, each member is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that investment banker has sold. Most syndicates are based on the undivided account arrangement.

BANK DICTIONARY

Loan extended by a group of banks to a corporate borrower. The loans-usually made at interest rates tied to a variable rate index such as the London Interbank Offered Rate (LIBOR) or rates on Bank Certificates of Deposit-are often sold to investors in the secondary loan market. In recent years, institutional investors such as mutual funds became major buyers of syndicated loans.

Syndicated loans to major corporate borrowers are rated by credit rating firms such as Standard & Poor's, using a rating system similar to that used for corporate bonds. With the creation of a secondary market linking loan-originating banks with investors, multi-bank commercial loans may some day trade as actively as corporate debt securities in the Over-The-Counter (OTC) dealer market. Contrast with Highly Leveraged Transaction a high-interest rate loan extended to riskier borrowers.

SYNDICATE FORMATION

A borrower's ability to secure a syndicated loan, though, is predicated on its ability to spur the creation of a syndicate in the first place. "No two syndications are identical," wrote Bunn. "The market changes every day. Many intangibles influence the structure and pricing of a credit, including the experience and depth of a company's management team; trends in the industry and market; and financial trends within a company."

The first thing the company has to do is select an agent to facilitate communications and transactions between the borrower and the banking institutions that will form the syndicate. "The first place to look for an agent is among your existing relationships," said Fidler and Neumeyer. "Certainly you will want a bank that has the necessary syndication capability and experience to obtain market credibility. Although the agent need not always be the largest participant in the syndication, the agent should have sufficient capital strength to be the anchor for the credit. Most important, however, is that you are comfortable with the bank. Because the agent is acting on your behalf, they must fully understand your business and share your attitudes and priorities."

Once an agent has been selected, the process of finding willing banks is undertaken. This phase of the process can vary considerably in terms of complexity. Some agents gauge the interest level of other lenders by simply sending them necessary financial information on the borrower and the intended shape and size of the syndicate group, as well as data on borrower operations, background, management, and marketing. Bunn noted that in other cases, however, this process can be more complex, involving extensive due diligence, the preparation of a complete syndication offering memorandum (including financial projections), and a formal bank presentation.

By and large, the length of time necessary to form a bank group is roughly equivalent to the complexity of the proposed deal. Creation of a syndicate can take place over the course of a few weeks or a few months. Analysts note, however, that the length of time necessary to conclude the deal is usually less if the banks are already familiar with the borrower's operations. Once the membership of the group has been determined, the relationship quickly assumes the character that the borrowing business would expect when dealing with a single lending institution. "This is not to say that the borrower relinquishes control over the process and the participants will still actively call on the borrower," noted Fidler and Neumeyer. "It is merely the interaction

between the participating banks that should diminish—to your benefit. The agent should educate you about the market and help you navigate the specifics of pricing and structuring the transaction."

Indeed, the agent's responsibilities are many and varied. The agent is charged with administering the syndicated facility itself, as well as all borrowings, repayments, interest settlements, and fee payments. A chief component of the administration function is to make sure that communications between the lending institutions and the borrower remain open so that both sides remain informed about changing business and market realities. In return for providing these services, the agent is compensated with an annual fee.

OTHER ADVANTAGES OF SYNDICATED LOANS

In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:

Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.

Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and prepayment rights without penalty.

Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.

Loan terms can be abbreviated. Increased feedback. Syndicate banks sometimes are willing to share perspectives on business issues

with the agent that they would be reluctant to share with the borrowing business. Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For

commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit."

Advantages and disadvantages of bank loan?In: Auto Loans and Financing, Small Business Loans, Shopping

Advantage: Speed

A bank loan can be secured quickly; in less than an hour, a qualified borrower can complete a bank loan transaction.

Advantage: Uses

A bank loan can be used in a number of ways; money can be borrowed for many large-ticke items, such as furniture, vehicles or home renovations.

OTHER ADVANTAGES

Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.

Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and prepayment rights without penalty.

Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.

Loan terms can be abbreviated.

Increased feedback. Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.

Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit." 

Disadvantage: Fees

Some loans carry a prepayment penalty, preventing the borrower from paying the note off early without incurring extra cost.

Disadvantage: Limitations

There are a number of limitations on the transaction. Good credit is often required to borrow money, and there are stipulations on how the money can be used.

DISADVANTAGE: CASH FLOW

Borrowing too much money can lead to decreased cash flow and payments can even overtake income in some cases; this is why many loan payments are limited to a certain percentage of a borrower's income

Syndicate Formation

A borrower's ability to secure a syndicated loan, though, is predicated on its ability to spur the creation of a syndicate in the first place. "No two syndications are identical," wrote Bunn. "The market changes every day. Many intangibles influence the structure and pricing of a credit, including the experience and depth of a company's management team; trends in the industry and market; and financial trends within a company."

The first thing the company has to do is select an agent to facilitate communications and transactions between the borrower and the banking institutions that will form the syndicate. "The first place to look for an agent is among your existing relationships," said Fidler and Neumeyer. "Certainly you will want a bank that has the necessary syndication capability and experience to obtain market credibility. Although the agent need not always be the largest participant in the syndication, the agent should have sufficient capital strength to be the anchor for the credit. Most important, however, is that you are comfortable with the bank. Because the agent is acting on your behalf, they must fully understand your business and share your attitudes and priorities."

Once an agent has been selected, the process of finding willing banks is undertaken. This phase of the process can vary considerably in terms of complexity. Some agents gauge the interest level of other lenders by simply sending them necessary financial information on the borrower and the intended shape and size of the syndicate group, as well as data on borrower operations, background, management, and marketing. Bunn noted that in other cases, however, this process can be more complex, involving extensive due diligence, the preparation of a complete syndication offering memorandum (including financial projections), and a formal bank presentation.

By and large, the length of time necessary to form a bank group is roughly equivalent to the complexity of the proposed deal. Creation of a syndicate can take place over the course of a few weeks or a few months. Analysts note, however, that the length of time necessary to conclude the deal is usually less if the banks are already familiar with the borrower's operations. Once the membership of the group has been determined, the relationship quickly assumes the character that the borrowing business would expect when dealing with a single lending institution. "This is not to say that the borrower relinquishes control over the process and the participants will still actively call on the borrower," noted Fidler and Neumeyer. "It is merely the interaction

between the participating banks that should diminish—to your benefit. The agent should educate you about the market and help you navigate the specifics of pricing and structuring the transaction."

Indeed, the agent's responsibilities are many and varied. The agent is charged with administering the syndicated facility itself, as well as all borrowings, repayments, interest settlements, and fee payments. A chief component of the administration function is to make sure that communications between the lending institutions and the borrower remain open so that both sides remain informed about changing business and market realities. In return for providing these services, the agent is compensated with an annual fee.

TYPES OF SYNDICATIONS

Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.

Underwritten deal

An underwritten deal is one for which the arrangers guarantee the entire commitment, then syndicate the loan. If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credit’s fundamentals, improve. If not, the arranger may be forced to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit.

Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flex-language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

Best-efforts syndication

A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close—or may need major surgery [clarify] to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.

Club deal

A club deal is a smaller loan—usually $25–100 million, but as high as $150 million—that is premarketed to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

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THE SYNDICATIONS PROCESS

Leveraged transactions fund a number of purposes. They provide support for general corporate purposes, including capital expenditures, working capital, and expansion. They refinance the existing capital structure or support a full recapitalization including, not infrequently, the payment of a dividend to the equity holders.

They provide funding to corporations undergoing restructurings, including bankruptcy, in the form of super senior loans also known as debtor in possession (DIP) loans. Their primary purpose, however, is to fund M&A activity, specifically leveraged buyouts, where the buyer uses the debt markets to acquire the acquisition target’s equity.

In the U.S., the core of leveraged lending comes from buyouts resulting from corporate activity, while, in Europe, private equity funds drive buyouts. In the U.S., all private equity related activities, including refinancings and recapitalizations, are called sponsored transactions; in Europe, they are referred to as LBOs.

A buyout transaction originates well before lenders see the transaction’s terms. In a buyout, the company is first put up for auction. With sponsored transactions, a company that is for the first time up for sale to private equity sponsors is a primary LBO; a secondary LBO is one that is going from one sponsor to another sponsor, and a tertiary is one that is going for the second time from sponsor to sponsor. A public-to-private transaction (P2P) occurs when a company is going from the public domain to a private equity sponsor.

As prospective acquirers are evaluating target companies, they are also lining up debt financing. A staple financing package may be on offer as part of the sale process. By the time the auction winner is announced, that acquirer usually has funds linked up via a financing package funded by its designated arranger, or, in Europe, mandated lead arranger (MLA).

Before awarding a mandate, an issuer might solicit bids from arrangers. The banks will outline their syndication strategy and qualifications, as well as their view on the way the loan will price in market. Once the mandate is awarded, the syndication process starts.

In Europe, where mezzanine capital funding is a market standard, issuers may choose to pursue a dual track approach to syndication whereby the MLAs handle the senior debt and a specialist mezzanine fund oversees placement of the subordinated mezzanine position.

The arranger will prepare an information memo (IM) describing the terms of the transactions. The IM typically will include an executive summary, investment considerations, a list of terms and conditions, an industry overview, and a financial model. Because loans are unregistered securities, this will be a confidential offering made only to qualified banks and accredited investors. If the issuer is speculative grade and seeking capital from nonbank investors, the arranger will often prepare a “public” version of the IM. This version will be stripped of all confidential material such as management financial projections so that it can be viewed by accounts that operate on the public side of the wall or that want to preserve their ability to buy bonds or stock or other public securities of the particular issuer (see the Public Versus Private section below). Naturally, investors that view materially nonpublic information of a company are disqualified from buying the company’s public securities for some period of time. As the IM (or “bank book,” in traditional market lingo) is being prepared, the syndicate desk will solicit informal feedback from potential investors on what their appetite for the deal will be and at what price they are willing to invest. Once this intelligence has been gathered, the agent will formally market the deal to potential investors.

The executive summary will include a description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials. Investment considerations will be, basically, management’s sales “pitch” for the deal.

The list of terms and conditions will be a preliminary term sheet describing the pricing, structure, collateral, covenants, and other terms of the credit (covenants are usually negotiated in detail after the arranger receives investor feedback).

The industry overview will be a description of the company’s industry and competitive position relative to its industry peers.

The financial model will be a detailed model of the issuer’s historical, pro forma, and projected financials including management’s high, low, and base case for the issuer.

Most new acquisition-related loans are kicked off at a bank meeting at which potential lenders hear management and the sponsor group (if there is one) describe what the terms of the loan are and what transaction it backs. Management will provide its vision for the transaction and, most importantly, tell why and how the lenders will be repaid on or ahead of schedule. In addition, investors will be briefed regarding the multiple exit strategies, including second ways out via asset sales. (If it is a small deal or a refinancing instead of a formal meeting, there may be a series of calls or one-on-one meetings with potential investors.)

In Europe, the syndication process has multiple steps reflecting the complexities of selling down through regional banks and investors. The roles of each of the players in each of the phases are based on their relationships in the market and access to paper. On the arrangers’ side, the players are determined by how well they can access capital in the market and bring in lenders. On the lenders’ side, it is about getting access to as many deals as possible.

There are three primary phases of syndication in Europe. During the underwriting phase, the sponsor or corporate borrowers designate the MLA (or the group of MLAs) and the deal is initially underwritten. During the sub-underwriting phases, other arrangers are brought into the deal. In general syndication, the transaction is opened up to the institutional investor market, along with other banks that are interested in participating.

In the U.S. and in Europe, once the loan is closed, the final terms are then documented in detailed credit and security agreements. Subsequently, liens are perfected and collateral is attached.

Loans, by their nature, are flexible documents that can be revised and amended from time to time after they have closed. These amendments require different levels of approval. Amendments can range from something as simple as a covenant waiver to something as complex as a change in the collateral package or allowing the issuer to stretch out its payments or make an acquisition.

Credit Facilities

Syndicated loans facilities (Credit Facilities) are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the requirement.

There are four main types of syndicated loan facilities: a revolving credit; a term loan; an L/C; and an acquisition or equipment line (a delayed-draw term loan).[5]

A revolving credit line allows borrowers to draw down, repay and reborrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowing (the facility fee). In the U.S., many revolvers to speculative-grade issuers are asset-based and thus tied to borrowing-base lending formulas that limit borrowers to a certain percentage of collateral, most often receivables and inventory. In Europe, revolvers are primarily designated to fund working capital or capital expenditures (capex).

A term loan is simply an installment loan, such as a loan one would use to buy a car. The borrower may draw on the loan during a short commitment period and repay it based on either a scheduled series of repayments or a one-time lump-sum payment at maturity (bullet payment). There are two principal types of term loans: an amortizing term loan and an institutional term loan.

An amortizing term loan (A-term loan or TLA) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication. In the U.S., A-term loans have become increasingly rare over the years as issuers bypassed the bank market and tapped institutional investors for all or most of their funded loans.

An institutional term loan (B-term, C-term or D-term loan) is a term-loan facility with a portion carved out for nonbank, institutional investors. These loans became more common as the institutional loan investor base grew in the U.S. and Europe. These loans are priced higher than amortizing term loans because they have longer maturities and bullet repayment schedules. This

institutional category also includes second-lien loans and covenant-lite loans.

Inside the syndication process: asset management

SYNDICATE CREDIT FORMATION

When considering an investment in low-income housing tax credits, don't overlook the need to evaluate the ability of the syndicator's asset management department to understand, oversee and protect your investment. The asset management department must serve much more than an accounting function and must have a keen understanding of how affordable housing is operated. This article will focus on the function of asset management beyond tax returns, Schedule K-1's and internal rate of return schedules.

Reporting

A primary responsibility of the syndicator's asset management department is to supply the investor with meaningful reporting. Throughout the transitional and stabilized stages of the life of the property, comparisons of actual data to reasonable benchmarks provide the most apparent indicators of performance.

These standards may be monitored in a variety of ways. The simplest is to establish the minimum thresholds and measure whether the property is meeting them. Nevertheless, many investors prefer the use of a more flexible system that not only establishes minimum goals, but will also indicate the level of achievement and degree of impact on the property's overall function. Systems involving an aggregate alphanumeric scoring system are useful in providing this type of analysis.

Property operations are evaluated primarily on occupancy and financial data. Occupancy data should be collected, at minimum, on a quarterly basis. Physical occupancy is calculated as a percentage comparing the units actually occupied to the total number of units on the property. Financial occupancy is calculated as a percentage comparing the gross potential rent (the total rent available if 100% of the units were rented) to the actual rent billed, less rent amounts written off as uncollectible, for properties on an accrual accounting basis, and to the actual rent collected for properties on a cash accounting basis.

Typical underwriting of a new deal will use 7% for rental losses, allowing for 5% physical vacancy and an additional 2% for bad debt. A common industry comfort level for occupancy at a stabilized property is 90% or greater. In most cases, at that level of occupancy the property will have no difficulty covering expenses.

Financial data should also be collected, at minimum, on a quarterly basis. Reports sent to the syndicator for review should include a balance sheet and operating statement. An appropriate analysis of the statements by the syndicator should include adjusting accruals for one-time expenses, such as capital improvement items, property insurance and real estate taxes. The agreed-upon reserve for replacement payments should also be accrued as an expense before calculating net operating income. The debt-service coverage is then calculated by comparing the debt-service payments to the net operating income.

Typical underwriting of a new deal will use 1.15 as the target for debt-service coverage. However, a common industry comfort level for debt-service coverage at a stabilized property is 1.0, indicating that it is generating sufficient income to pay all of the expenses and fund the required reserve for replacement.

However, evaluation of property operations based purely on occupancy and financial benchmarks would be akin to using height and weight charts as the only to method to evaluate your physical health. Other factors contribute either positively or negatively to the overall stability of the property. For example, restrictions placed on the property because of sources of financing or rental assistance programs may limit the returns

available to owners and therefore allow only for annual budgets at or very close to a 1.0 debt-service coverage.

Nonetheless, these programs enhance stability due to reduced debt-service expense and rental advantages. Therefore, the property's available operating cash, seasonal variances, proposed rent increases, the financial strength of the general partner, management history, the local market and the physical condition must be factored as part of the overall snapshot of property performance.

Physical inspections

Visits to the property must be performed regularly. Occupancy and financial reports alone may prove to be deceptive.

The following incident illustrates the point: A large owner in the Midwest contracted with a new management company largely because of its promise to increase the cash flow at the property. Occupancy was running approximately 96% when it took over. At the end of the first 12 months, true to its word, the company had increased the net operating income and things seemed to be going well. However, after about 20 months, occupancy at the property was falling rapidly and reached 85%, an all-time low.

The management company offered excuses based on problems in the local rental market and single-family home buying. Upon inspection of the property, the true problem became apparent. In order to bolster the bottom line, the management company had cut back on necessary services. Common areas, unit painting, work orders, hallway cleaning and maintenance were being neglected and tenant complaints were ignored. The result was that tenants were leaving as their leases expired at a much higher rate than normal.

Additionally, maintenance on vacant units was not being done well, and items such as carpeting and appliances were not being replaced where necessary. As a result, the property was offering a substandard product and the units couldn't be leased. Even after the situation was corrected, it took several months for the property to recover from the poor reputation that had developed. The money lost because of the occupancy problem and slow recovery by far outweighed the increased cash flow realized on that first-year operating statement. The lesson is that the problems would have been apparent through an inspection of the property many months before they affected the operating statement or occupancy.

Property inspections can help avoid and solve problems. Inspecting the buildings, walking common areas, observing that tenant rules are being enforced and noting how well the management appears to be overseeing the property should be done on every visit. If there appear to be problems, units should be inspected, tenants should be interviewed and on-site management should be queried as to how they plan to respond. In addition, the neighborhood and community should be studied.

Issues arising from the property inspection should be followed up directly with the general partner. Too often the general partner may not have been to the property in some time and has no sense of its present condition. There is a tendency to become complacent and assume the management company is doing their job. Broken smoke detectors, inoperable furnaces, tripping hazards or any other health and safety issues should require the general partner to take immediate corrective action and certify completion to the syndicator. A corrective action plan addressing all other issues should be requested from the general partner and subsequent visits should verify completion.

Tax credit compliance

Tax credit compliance is a good news and bad news situation. The good news is that issues of noncompliance after the initial lease-up that are addressed in a timely manner may not necessary adversely affect the overall delivery of credits. The bad news is that issues of noncompliance during the initial lease-up definitely have an effect on overall credit delivery and have a 15-year lookback by the IRS.

For that reason, as noted in the previous article in this series (or, see Journal of Tax Credit Investing, Winter 2003, page 22), an audit of all of the initial tenant files by the syndicator or a qualified third party should be completed to verify compliance.

A thorough file audit will include a review of the verifications for income, assets, student status, and lease terms and a review of copies of the original applications to check for inconsistencies.

Your syndicator should become involved in the audit process as early as possible after lease-up begins to uncover problem areas and initiate corrections. Some syndicators may require a pre-occurrence approval of the initial tenants before move-in, but this may slow down the leasing process and adversely affect marketing. The syndicator should archive the initial tenant files and audit information for the 15-year compliance period.

IRS Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, is used by the issuing housing credit agency to report any out-of-compliance conditions and the subsequent date of correction. This form is used to report both tenant compliance issues as well as problems noted on the physical inspections that are performed by the housing agency or their third-party contractor. Your syndicator should obligate the general partner to report any IRS Form 8823 that is issued.

Additionally, forwarding of a regular certification of tax credit compliance, tenant summaries, all housing agency compliance reports and audits should be required of the general partner.

Dealing with problems

Even with the most thorough due diligence, there is a possibility that at some point in the 15-year compliance period any property may experience problems. Your syndicator should keep a watch list indicating which properties are currently under closer scrutiny. Please keep in mind that this in and of itself does not indicate that there is cause for concern. Rather, the fact that a property is on the watch list should be a sign that the asset management department is having a proactive involvement with the property operations. Remember that as in most business ventures, it is much easier to identify problems than to recognize solutions. Problem solving is where your syndicator's asset management department will prove its mettle.

Douglas Jenkins is portfolio asset manager for Raymond James Tax Credit Funds. He is responsible for building working relationships with affordable housing developers, monitoring property operations and facilitating effective solutions to issues that arise during the management of LIHTC properties. Joining Raymond James Tax Credit Funds in 2001, Jenkins has 14 years of affordable housing experience encompassing the HUD Sec. 8 and Sec. 236, FmHA and Sec. 42 LIHTC programs. Most recently he served as vice president of operations for a Chicago-based developer and management agent. In addition, he has held the positions of regional property manager and director of affordable housing programs. Jenkins holds certifications through a variety of recognized housing organizations, including certified credit compliance professional - Spectrum and Housing Credit Compliance Professional - National Association of Home Builders.

Disadvantages of syndicated loans?

time consuming,only for huge borrowings, long and lengthy process and different credit and financial checks,

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SYNDICATE CREDIT RISK

2.1.1 Credit risk- is incurred by AIs lending under a syndicatedtransaction. Although the creditworthiness of theborrower may be good - usually only the moreloan market - the inherent credit risk will tend to be higherwhere the tenor of the obligations is longer and the totalsize of the credit extended to the borrower is relativelylarge3. This is particularly true in cases where the dealamount goes up simply because of over-subscription forthe syndicated transaction.

2.1.2 Regardless of their extent of participation, syndicatemembers (i.e. lenders) should not rely solely on the creditappraisal prepared by the arranger. Each membershould perform its independent analysis with respectto the credit quality of the borrower and the suitability ofthe deal in relation to its own risk appetite.

Market risk

2.2.1 The level of market risk in syndicated lending depends onthe level of the AI's involvement in a deal. AIs acting as underwriters are subject to market risk because, althoughthey intend to sell all or part of their participations, theymay end up with an unsold portion on their books for a

period of time pending eventual sale, particularly if:

• due to unforeseen circumstances, the borrower'sfinancial condition deteriorates to such an extentas to affect an underwriter’s ability to distribute theunsold portion; or

• market interest rates move adversely. As themajority of syndicated loans are priced on a floating-rate basis, this would be relevant inrespect of:

- fixed-rate deals; or

- situations where market spreads widen after asyndicated transaction is concluded. This would render the deal unattractive to potential lenders.

2.2.2 It is usually the case that the period between underwriting and completion of syndication is relatively short and the extent of the risk is therefore limited. Nevertheless it is customary to cater for this risk by "material adverse change" or “force majeure” clauses in the documentation,

covering market disruption or deteriorating credit circumstances, which would enable underwriters to restructure or cancel a deal.

2.2.3 AIs should have policies and procedures to cater for such situations, including documentation standards, hedgingfor interest rate and credit risks (e.g. by use of derivative

instruments), if appropriate, and reporting to senior management on any significant unsold sticks.

Interest rate risk

2.3.1 Depending on how a deal is priced and funded there maybe different degrees of interest rate risk. It is incurred by AIs which have provided lending commitments under legally binding documentation. AIs should ensure that such risk arising from syndicated lending activities is

properly managed at the product level or integrated into their overall interest rate risk management process. The handling of such risk is usually the responsibility of the Treasury Department. underwriters are subject to market risk because, although they intend to sell all or part of their participations, they may end up with an unsold portion on their books for a

period of time pending eventual sale, particularly if:

• due to unforeseen circumstances, the borrower's financial condition deteriorates to such an extent as to affect an underwriter’s ability to distribute the unsold portion; or

• market interest rates move adversely. As the majority of syndicated loans are priced on a floating-rate basis, this would be relevant in respect of:

- fixed-rate deals; or

- situations where market spreads widen after a syndicated transaction is concluded. This

would render the deal unattractive to potential lenders.

2.2.2 It is usually the case that the period between underwriting and completion of syndication is relatively short and the extent of the risk is therefore limited. Nevertheless it is customary to cater for this risk by "material adverse change" or “force majeure” clauses in the documentation,

covering market disruption or deteriorating credit circumstances, which would enable underwriters to restructure or cancel a deal.

2.2.3 AIs should have policies and procedures to cater for such situations, including documentation standards, hedging for interest rate and credit risks (e.g. by use of derivative

instruments), if appropriate, and reporting to senior management on any significant unsold sticks.

Interest rate risk

2.3.1 Depending on how a deal is priced and funded there maybe different degrees of interest rate risk. It is incurred by AIs which have provided lending commitments under legally binding documentation. AIs should ensure thatsuch risk arising from syndicated lending activities is

properly managed at the product level or integrated into their overall interest rate risk management process. The handling of such risk is usually the responsibility of the Treasury Department. underwriters are subject to market risk because, although they intend to sell all or part of their participations, they may end up with an unsold portion on their books for a

period of time pending eventual sale, particularly if:

• due to unforeseen circumstances, the borrower's financial condition deteriorates to such an extent as to affect an underwriter’s ability to distribute the unsold portion; or

• market interest rates move adversely. As the majority of syndicated loans are priced on a

floating-rate basis, this would be relevant in respect of:

- fixed-rate deals; or

- situations where market spreads widen after a syndicated transaction is concluded. This

would render the deal unattractive to potential lenders.

2.2.2 It is usually the case that the period between underwriting and completion of syndication is relatively short and the extent of the risk is therefore limited. Nevertheless it is customary to cater for this risk by "material adverse change" or “force majeure” clauses in the documentation,covering market disruption or deteriorating credit circumstances, which would enable underwriters to restructure or cancel a deal.

2.2.3 AIs should have policies and procedures to cater for such situations, including documentation standards, hedging for interest rate and credit risks (e.g. by use of derivative

instruments), if appropriate, and reporting to senior management on any significant unsold sticks.

Operational risk- in syndicated lending is incurred by the lenders but it also affects the agent as the latter is responsible for handling certain aspects of credit administration. Errors due to oversight or negligence, e.g. in giving timely advice to syndicate members, in arranging

drawdowns, in refixing interest rates or in effecting interest and principal payments to syndicate members, can be costly in terms of both monetary compensation and reputation.

2.5.2 AIs taking on the role of agent should ensure that their systems are adequate and their staff are capable of carrying out their role efficiently. They may be required to compensate syndicate members if, for example, funds are disbursed late or to the wrong parties. They shouldalso cater for counterparty risk on settlement of payments.

Legal risk

2.6.1 Legal risk is incurred by underwriters, lenders and the agent once the documentation is signed.

2.6.2 Because of the scale, term and complexity of syndicatedlending, with multiple parties involved, legal arrangements need to be as watertight as possible. Experienced staff of the arranger should work closely with legal counsel to ensure that the interests of lenders are adequately protected. This should be by negotiating with the borrower to ensure that appropriate and enforceable covenants are included in the information memorandum and that they are reflected in the syndicated loan agreement along with suitable protective clauses.

2.6.3 All relevant documentation should be circulated to syndicate members for review and comment before suchdocumentation is signed. It is up to prospective lenders

to decide whether those covenants are adequate

CONCLUSION

SyndicateBank is known as “Small Man’s Big Bank” and initiated various measures for financial inclusion right from the inception. Be it the introduction of Pigmy Deposit Scheme or financing agriculture sector or establishing training institute for rural unemployed, SyndicateBank is always the front runner in implementing innovative banking schemes meant for the economic development of the people belonging to weaker sections, farmers, rural artisans etc. In the context of the present need to provide banking facilities to a vast majority of the population, SyndicateBank will continue to implement various programmes in reaching the unreached to achieve the objective of g SyndicateBank is known as “Small Man’s Big Bank” and initiated various measures for financial inclusion right from the inception. Be it the introduction of Pigmy Deposit Scheme or financing agriculture sector or establishing training institute for rural

unemployed, SyndicateBank is always the front runner in implementing innovative banking schemes meant for the economic development of the people belonging to weaker sections, farmers, rural artisans etc. In the context of the present need to provide banking facilities to a vast majority of the population, SyndicateBank will continue to implement various programmes in reaching the unreached to achieve the objective of Greater financial inclusion.

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