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.
When multiple banks or lenders come together to arrange for the loan requirement of a single borrower, it is referred to as a loan syndicate.
They all fund portions of the same loan with a negotiated set of terms and conditions. This makes no difference on the borrower’s side.
This can be done to fulfill the loan requirements of a big corporation, government, or large project. Loan syndication might have the following purposes -
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.
The loan syndication process can happen in many ways. Based on that, here are the types of loan syndication -
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 -
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 -
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 -
When someone opts for a syndicated loan, there are multiple parties involved in the process. They are listed here -
It is the individual, or company that seeks out the loan.
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.
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.
These are the banks that participate in the syndication and help arrange the funds required by the borrower.
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.
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.
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.
Loan syndication has many benefits like the borrower getting the required amount from one source and not being involved in the process of arranging it from multiple sources. It also helps the borrower gain a positive reputation for themselves once they repay the loan.
For the banks involved, it means a lesser risk as they share portions of the loan among themselves.
The lead bank and the co-lenders all charge a fee for participating in the syndication. Often the lead bank charges a percentage of the loan amount as the syndication fee and distributes it among the co-lenders.
No, loan syndication is not investment banking. But the lead bank that arranges the syndication is often an investment bank.
No, a syndicated loan is not considered a security.
The 2 major aims of loan syndication are to lend large funds to businesses that may be too large for a single capital base and to share the risk among fellow lenders while participating in a big financial opportunity.
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