Syndication is financing provided by a group of lenders for a single borrower. A syndicated loan, or a syndicated bank facility, is financing offered by a group of lenders called a syndicate who work together to provide funds for a borrower. The borrower can be a corporation, a large project, or a sovereign government. In cases of syndicated loans, there is typically a lead bank or underwriter, known as the arranger, the agent, or the lead lender. The lead bank may put up a proportionally bigger share of the loan, or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks.
Usually, syndication occurs when a borrower requires capital too large for an individual lender to provide or when the credit facility is not within the scope of the lender’s risk exposure. The lead bank which is the bank that oversees the arrangement and administration of the syndication recruits the syndicate members and negotiates financing terms.
The lead bank conducts necessary due diligence, thereafter an information memorandum is
prepared. The information memorandum includes financial statements, company profile
and directorship details of the borrower.
Syndications have become a major source of corporate funding. Firms seek loans and
funding for various business reasons that include capital for mergers and acquisitions and
capital expenditure projects. The prime motive of a syndicated loan is to distribute the risk
of a borrower’s payment default across multiple lenders. Usually, there is only one loan
agreement for the entire syndicate.
Features of Loan Syndication:
- Large amount.
- No separate agreement between an individual bank and the borrower.
- No ambiguity used to be there.
- Low risk is found in loan syndication.
- Each bank is not necessarily to contribute an equal amount.