What is Loan Syndication

If you have ever taken a big loan or are in the process of taking one, you must have heard about loan syndications. 

Have you ever wondered about the loan syndication meaning? This article will explain everything that there is to know about syndicated loans.

Loan Syndication Process - an Example

Now that you understand loan syndication meaning, let’s try to understand it with an example.

Imagine you are a company that wants to buy out another company in the market. This will require a huge amount of funds. You reach out to the bank, but it is not possible for the bank to arrange for the sum of money required by itself. 

Thus, the bank gets in touch with other banks and forms a syndicate. Together, they share the responsibility of arranging for the loan amount, the risk involved, and all other factors. 

Each bank involved may have different requirements for collateral, and they proceed with their own rules for their portion of the loan amount.

All in all, there are many loans that are being passed, but it reaches you as a syndicated loan and has one loan agreement and one set of terms and conditions.

One of these banks, preferably the bank you reached out to that initiated the formation of the syndicate also acts as the lead agent and figures out the uniform terms and conditions for the loan. 

This is how the loan syndication process works.

Types of Loan Syndication

The loan syndication process can happen in many ways. Based on that, here are the types of loan syndication - 

Underwritten Deal

In this type of loan syndication, the lead bank or the one who arranges it makes a guarantee for the entire loan amount. 

If any portion of the loan amount is not subscribed by the borrower for whatever reason, the lead bank can absorb the entire amount.

Some features of the underwritten deal loan syndication are mentioned here - 

• Lead bank may reach out to other banks or investors if the loan’s conditions improve
• Attracts a high syndicate fee, because if the borrower doesn’t use the whole amount, it might be a loss for the lead bank
• Makes a huge profit for the bank that arranges the syndication, if the market conditions are good

Best-efforts Syndication

The best-efforts syndication is exactly the opposite of underwritten deal syndication. 

Here, the lead bank does not guarantee the total amount and tries to find subscribers for the remainder. 

Here is what makes it opposite to the previously mentioned type - 

• If the lead bank cannot find investors, they do not absorb the remainder amount
• On failing to find subscribers for the remainder amount, the borrower may be forced to take a lower amount
• The borrower might even choose to cancel the loan in case the lead bank cannot arrange for it

Club Deal

In the case of a club deal, the loan amount is equally divided between the members of the syndicate. Some of the features of this type of syndication are - 

• Each investor or bank brings an equal amount of funds to arrange the total loan amount
• The fee is also equally divided among the syndicate
• This happens mostly in cases of relatively smaller amounts of loan

Involved in the Loan Syndication Process

When someone opts for a syndicated loan, there are multiple parties involved in the process. They are listed here -

Borrower 

It is the individual, or company that seeks out the loan.

Lead Bank

Also known as the lead arranger or the lead manager, this is the primary bank involved in the process. 

This is mostly the first bank or agent that the borrower reaches out to and they are responsible for the negotiation of all terms and conditions.

Co-manager

They may also be called the co-arranger and they decide who else will participate in the syndication. They find more banks or institutions to take part in the syndication process.

Co-lenders

These are the banks that participate in the syndication and help arrange the funds required by the borrower.

Agent Bank

This is the bank that acts as the mediator and takes care of the day-to-day workings of the loan. 

They make negotiations between the borrower and the lead bank. In some cases, the lead bank may act as the agent bank.

Decision-making Panel

This involves the banks that have made the maximum contribution to the loan syndication. They come together to make the process easier, instead of consulting each and every co-lender involved in the syndication.

Loan Syndication Companies in India

If you are searching for loan syndication companies in India, read ahead. 

Almost all banks may act as lead agents or lead banks in a loan syndication process. 

Other than major banks, companies like Resurgent India Limited also act as lead agents for a loan syndication process. 

Loan syndication is a great way for businesses to fund their ventures without any upper limit. 

If the amount is too big for a single lender or bank, they can always form a syndicate and meet the needs of the borrower.

This helps both the bank and the borrower. The bank ends up having lesser risk as there are more investors, and they can be part of a bigger project. In this process, the lead bank charges some syndicate fees for arranging more investors.