What Does Loan Syndication Mean?

The process of involving several different lenders in providing various portions of a loan. Investopedia explains Loan Syndication

Mainly used in extremely large loan situations, syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because the lender isn't the only creditor

Syndicated loan

A syndicated loan 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 LIBOR in the U.S., 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.[

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 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 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.

The Syndication 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.

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.

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

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.

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.

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 LOC; 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).

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.

CORPORATE BANKING

Corporate Banking represents the wide range of banking andfinancial services provided to domestic and internationaloperations of large local corporates and local operations ofmultinationals corporations.Services include access to commercial banking products,including working capital facilities such as domestic andinternational trade operations and funding, channel financing, andoverdrafts, as well as domestic and international payments, INRterm loans (including external commercial borrowings in foreigncurrency), letters of guarantee etc.Banks normally provide credit in the form of overdrafts, loans,bills discounted, or import and export finance. The process ofextending any of the said forms to corporate borrowers passesthrough two distinctive phases; the credit decision makingprocess (account relationship management) and the banks'internal operations.Corporate Banking services are an integral part of the CorporateInvestment Banking and Markets (CIBM) structure, which focuseson offering a full range of services to multinationals, largedomestic corporates and institutional clients.

Banks provide facilities to Corporate houses for different purposes. Banks are offering financial services for new projects as well as expansion, diversification and modernization of existing projects in infrastructure and non-infrastructure sectors for economic development of our country. Infrastructure sector includes Road & Urban Infrastructure, Power and Utilities, Oil & Gas and other natural resources, Ports and Air[ports and Telecommunications. Non-infrastructure sector includes Manufacturing i.e. cement, steel, mining, engineering, auto components, textiles, Pulp & Papers, Chemical & Pharmaceuticals etc; Services i.e. Tourism & Hospitality, Educational Institutions, Health Industry etc.  

CORPORATE BANKING OPERATIONS The bank mostly lend against appropriate tangible securitiessuch as deposits, shares, debentures, property, guarantees

supported by tangible securities, life policies, goods, gold or otherprecious metal.The bank may also lend against intangible securities such asunsupported guarantees or assignment of sums due to theborrower by third parties.It is essential that the bank follows the proper procedures inorder to obtain good title when taking a security.There is a difference between possession and ownership.The various forms of documents used for obtaining differenttypes of security are also important. Inadequate documentationmay well cause losses to the is particularly true for the TradeFinancing documentation and the Securities Agreement relating to

goods.

The bank must also follow proper procedures to realise securitiesotherwise losses may be incurred.The corporate operations divisions are normally responsible formaintaining securities documentation and updating thecustomers' mandates with fresh account documentation, accountstatements, financial statements and relationship reviews.Handling and treatment of delinquent accounts is also animportant area of operations.Grading of bad and doubtful debts for an effective recoveryprocess is important.An effective delinquency policy is essential to avoid unnecessaryfinancial losses

Meaning of Multiple Banking

Multiple Banking is a banking arrangement where a borrowal avails of finance independently from more than one bank. Thus, there is no contractual relationship between various bankers of such borrower. Also in such arrangement each banker is free to do his own credit assessment and old security independent of other bankers.

RBI Guidelines on Multiple banking

Answer: RBI has allowed this type of banking. There are no significant specific guidelines issued by RBI on multiplebanking.

Operational difficulty for borrowers

In multiple banking arrangement, a borrower gets freedom to deal with each bank separately and thus can negotiate borrowal terms one to one with each bank. As rider, such borrower also has to spend more time and effort in dealing with multiple banks.

CONSORTIUM VS. MULTIPLE BANKING

The borrowers, particularly the big ones, are nowadays a very happy lot as the bankers run after them offering cheap finance. This has given birth to the practice of multiple banking—a situation when one borrower is banking with many banks. This should have been governed under the concept of consortium financing.

Under consortium financing, several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and follow-up exercises, but in multiple banking, different banks provide finance and different banking facilities to a single borrower without having a common arrangement and understanding between the lenders. The practice of multiple banking has increased tremendously during the last years . This is due to the increasing competition and the bankers desire to grow in a short span of time.

Lending under Consortium Arrangement/Multiple Banking Arrangements

As you are aware, various regulatory prescriptions regarding conduct of consortium / multiple banking / syndicate arrangements were withdrawn by Reserve Bank of India in October 1996 with a view to introducing flexibility in the credit delivery system and to facilitate smooth flow of credit. However, Central Vigilance Commission, Government of India, in the light of frauds involving consortium/multiple banking arrangements which have taken place recently, has expressed concerns on the working of Consortium Lending and Multiple Banking Arrangements in the banking system. The Commission has attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks.

2 . The matter has been examined by us in consultation with the Indian Banks Association who are of the opinion that there is need for improving the sharing/dissemination of information among the banks about the status of the borrowers enjoying credit facilities from more than one bank. Accordingly, the banks are encouraged to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks as under:

i. At the time of granting fresh facilities, banks may obtain declaration from the borrowers about the credit facilities already enjoyed by them from other banks in Annex 1. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rs.5.00 crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks, and introduce a system of exchange of information with other banks as indicated above.

ii. Subsequently, banks should exchange information about the conduct of the borrowers' accounts with other banks in the format given in Annex II at least at quarterly intervals.

iii. Obtain regular certification by a professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are in vogue, as per specimen given in Annex III.

iv. Make greater use of credit reports available from CIBIL. v. The banks should incorporate suitable clauses in the loan agreements in

future (at the time of next renewal in the case of existing facilities) regarding exchange of credit information so as to address confidentiality issues

MINIMUM INFORMATION TO BE DECLARED BY BORROWEING ENTITIES TO BANKS WHILE APPROACHING FOR FINANCE UNDER MULTIPLE BANKING ARRANGEMENTS

A. Details of borrowing arrangements from other banks (institution wise)

I. Name and address of bank/institution

 

II. Purpose for which borrowed  III. Limit sanctioned (full details to be given, e.g. working capital / demand loan/ term loan / short term loan)/ foreign currency loan, corporate loan / line of credit / Channel financing contingent facilities like LC, BG, DPG (I & F) etc. Also, state L/C bills discounting/project wise finance availed)

 

IV. Date of sanction  V. Present outstanding  VI. Overdues position, if any  VII. Repayment terms (for demand loans,term loans, corporate loans, project -wise finance)

 

VIII. Security offered (complete details of security both primary and collateralincluding specific cash flows assigned to project wise finance/loan raised &personal/ corporate guarantee, to befurnished)

 

IX. Requests for facilities which are underprocess

[The information to be given for domestic and overseas borrowings from commercial banks, Financial Institutions and NBFCs]

B. Miscellaneous Details

i. CPs raised during the year andcurrent outstanding

 

ii. Details of financing outside banking system e.g. L/C Bills discounting

 

iii. Main and allied activities with locations

 

iv. Territory of sales and market share

 

v. Details of financial aspects incl.DSCR Projections wherever applicable as per requirement of bank –Imp. Financial covenants, if any,agreed to/accepted with other lenders.

 

vi. CID A/cs, within/outside financingBanks, being operated, if any

 

vii. Demands by statutory authorities/current status thereof

 

viii. Pending litigations  ix. A declaration authorizing the bank to share information with other financing banks

 

REVISED FORMAT UNDER MULTIPLE BANKING ARRANGEMENTCREDIT INFORMATION EXCHANGE

PART I (BIO DATA)I. Borrowing party's name and address

 

II. Constitution  III. Names of Directors / Partners  IV. Business activity

Main Allied

 

V. Names of other financing Banksp

 

VI. Net worth of Directors/Partners  VII. Group affiliation, if any  VIII. Date on associate concerns, if banking with the same bank

 

IX. Changes in shareholding and management from the previous report, if any

 

PART II (FINANCIAL)I. IRAC Classification  II. Internal Credit rating with narration

 

III. External Credit rating, if any  IV. Latest available Annual Reportof the borrower

As on ---------------

PART III (EXPOSURE DETAILS)I. Type of credit facilities, e.g.working capital loan / demand loan / term loan / short termloan / foreign currency loan,corporate loan / line of credit /Channel financing, contingent facilities like LC, BG & DPG (I & F) etc. Also, state L/Cbills discounting / project wisefinance availed).

 

II. Purpose of loan  III. Date of loan facilities (including temporary facilities)

 

IV. Amount sanctioned (facilitywise)

 

V. Balance outstanding (facilitywise)

 

VI. Repayment terms  VII. Security offered

Primary Collateral Personal / Corporate

Guarantees Extent of control over cash

flow

 

VIII. Defaults in term commitments/lease rentals / others

 

IX. Any other special informationlike court cases, statutory dues, major defaults, adverseinternal / external auditobservations .

 

PART IV (EXPERIENCE)(*)I. Conduct of funded facilities(based on cash management/tendency to overdraw)

 

II. Conduct of contingent facilities (based on paymenthistory)

 

III. Compliance with financialcovenants

 

IV. Company's internal systems &procedures

 

V. Quality of management  VI. Overall Assessment  

(The above to be rated as good, satisfactory or below par only)