To begin with, it of immense importance to have a clear definition of the various terminologies that shall be encountered in the course of this discussion.
The term consortium means a combination or association of various financial institutions, businesses or investors with the main purpose being to engage in a common or joint venture.
A syndicated loan is that loan given by several lenders to one part or single borrower. The reason why syndicated loans get made in this way is because they involve too much or large amounts of money that it proves too hefty to be handled by one lender in the market. This loan operates in several ways like any other loan in that it attracts an interest to it either in fixed or floating form, and it also involves a time frame for repayments. The loan can either be a direct one or a revolving line of credit and in certain cases a combination of the two. These loans are, however, made on the basis of best effort. This means that if the respective lenders cannot be able to raise enough capital or bring additional lenders on board to cover the required amount, the funds so borrowed will be short of the expected or anticipated sum. (Bavaria, 2002).
The syndicated loan market gives room for an efficient geographical and institutional way of sharing risks. Large United States and European banks outsource loans for upcoming market borrowers and allocate the same to various local banks. In the Euro area, banks have developed pan – European lending strategies and have found funding outside the Euro area.
Syndication process starts by the issuer company (the borrower) by soliciting bids from arrangers (banks). The banks then forward their tender to the borrower outlining how they intend to go about the syndication process and their qualifications, as well as a brief synopsis of how they expect the loan facility to price in the market. The best qualified bank “i.e. the arranger” gets mandated to start the syndication process. The arranger then drafts the Loan information memorandum, which is a document which details the borrowers’ nature of business, its management structure and books of accounts, as well as describes the sort of transactions (that is, the parameters of the loan facility).
Two specific features depict syndicated loans. The transaction always involves more than a single lender (the participating banks), and each of the lenders has a separate, severable duty as one of the underwriters of a fraction of the total sum in its own right as an underwriter (Rhodes and Campbell, 2000). Therefore, syndication lending is a loan facility in which multiple banks “regardless of any event,” are liable “only up to a precise percentage of the entire sum of credit or to a quoted dollar amount.” Despite the fact that syndicated loan facility involves several lenders whose liability extent differ, it is governed by a common credit and security documentation. Syndicated loans, like any other credit facility, can be either secured or unsecured. Generally, they get a preference over all other forms of credit, that is, syndicated loan holders get first priority in the event that the borrower cannot be able to fulfill his obligation as per the loan agreement. Theoretically, holders of syndicated loan must be paid in full before all creditors’ claims can be satisfied. Leveraged syndicated loan facility are distinctively senior to any other debt under the borrower’s capital structure, on the other hand, syndicated loans of investment grade firms are regularly at the same rank of seniority as any other senior bonds. (BIS Quarterly Review, 2004)
In some cases, senior creditors may find it favorable to accept less than the entire payment in yield for a quick resolution of a distressed loan. Senior creditors find their influence diminishing if their borrower has entered into bankruptcy proceedings.
The Development Of The Syndicate Loan Market
The development and growth of syndicated lending has been classified into three phases. Syndicate lending initially developed as an independent business in the early 1970’s. During those early years of syndicate lending development, syndicated loan facility was the most preferred debt instrument of the developing countries. Due to defaults by borrowers experienced in the 1980’s, syndicated loan market underwent a radical restructuring which resulted for instance, conversion of the Mexican debt into Brady bonds. That conversion process resulted in an emerging trend which saw market borrowers change preference to bond financing, thereby resulting to reduction in syndicate lending business. However, in the 1990’s, there was a revived interest of the syndicated loans from borrowers in the USA, which has eventually progressed into becoming the principal corporate finance market within the United States. Again it was also the principal source of underwriting funds for lenders during the late 1990s. (Bavaria, 2003)
The early years of 1970s saw the era of syndicated lending development and the initial phase of expansion. Between the years, 1970 to around the year 1982 marked the first phase of syndicated lending, where medium – term syndicated loans got widely used to fund projects in developing countries, i.e. Africa, Asia and South America. During this initial phase, syndication gave an opportunity to smaller United States financial entities to establish a business presence in the emerging/developing markets without having to establish a local presence. This saw syndicated lending to borrowers from developing countries from grow exponentially, effectively displacing bilateral lending.
In August 1982 saw a massive default of interest payments by countries from the Latin America, starting with Mexico followed by the other countries among them Brazil, Venezuela, and the Philippines. Syndicated lending hit its bottom low in the year 1985. Citibank, followed by other American banks subsequently wrote down most of their emerging market loans. The then US Secretary of treasury Nicholas Brady initiated a plan whereby the creditors negotiated to convert the syndicated loans for “Brandy” bonds.
By the early 1990s the banks, which had incurred massive losses during the dark periods of the crisis, started applying mitigating risk pricing policies to the syndicated loan facility. It is these policies of the 1990s that saw syndicated lending grow in bounds and leaps to date. Signings of new loans – including domestic facilities – totaled $ 1.6 trillion in 2003, which is more than thrice the 1993 amounts. Borrowers from upcoming markets and industrialized countries similarly have been tapping this market, where the former accounts for 16% of business, while, for the latter, there is an equal split between Western Europe and the United States. (BIS Quarterly Review, 2004)
Types of Syndications
Syndications are of three types:
An underwritten deal
A best – efforts syndication
And a club deal
The Underwritten deal
This is a syndicate deal where the arranger guarantees and commits itself, then goes ahead and syndicates the loan. This is a high risk which the arranger takes in underwriting the syndicate deal. If the participating banks cannot fully subscribe the syndicated loan, the arranger commits itself to absorb the loan amount not subscribed for, which they later sell to other investors. The advantage of this type of loan syndication deal is if the market forces are in such a way that the credits fundamentals will improve, the arranger will sell the loan at a premium or profit hence gaining immensely. However, if the loans fundamentals are such that the market prices will be unfavorable to the loan facility, the arranger may be compelled to sell at a loss or discount. Despite this enormous financial risk on the part of the arrangers business, one would ask why then underwrite? First, an underwritten syndicated loan facility will most likely be granted a mandate to organize a syndicate. Second, underwritten loan facility remunerate attractive agency fees.
Best – efforts syndications;
A best – efforts syndicate is one where the arranger group commits to underwrite the syndicate loan amount partially, leaving the credit to the forces of the market. If the syndicated loan becomes undersubscribed, the credit probably never closes. Traditionally, best efforts syndications got adopted by risky borrowers. Nowadays, best – effort syndications acceptance by the market has been on the rise.
A club deal is a syndicated loan facility involving relatively smaller amounts of credit (usually loans of amounts between $ 25 million to $ 150 million) that get pre-marketed to an association of closely related banks. The arranger is usually a first among equals, whereas each lender obtains a full cut, or close to a full share of the fees. (Bavaria, 2003).
Types Of Syndicated Loan Facilities
There are mainly four types of facilities in a syndicated loan:
A revolving credit ( one within which there are options for swing line loans, that is, a small overnight borrowing credit line typically provided by the agent; multi – currency borrowing, competitive bid options, term out and evergreen extensions)
A term loan
An LOC (These are guarantees provided by lenders to pay off the loan facility in the event that the borrower will not be able to pay)
An equipment or acquisition line (a delayed – draw term loan)
Revolving loan is a loan facility whereby the borrower pays a certain sum of money as commitment fee, and is then allowed access to loan funds as at and when needed. Usually, revolving fund is used for funding working capital, which fluctuates often depending on the levels of the borrowers’ business activity levels. Revolving funds is accessible to both corporate companies and individuals. Apart from the commitment fee, corporate borrowers also incur interest expense. (Bavaria, 2002)
From the term “bridge”, bridge financing simply implies filling in the gap financially until another permanent finance is secured. In other terms, bridge loan can be described as a temporary financing which is accessible to a person or company until the company or individual secures permanent financing, or else removes an existing duty. This kind of financing permits the user to fulfill current duties by supplying immediate cash flows. (Assender, 2000) Bridge loans are temporary in nature or short term (usually up to one year) with relatively high rates of interest and are normally secured by some form of an asset which serves as the collateral, e.g. a real asset, Machinery or equipment or plant, or inventory. Bridge loans are also referred to as interim financing, or gap financing, or swing financing. A classic scenario where bridge financing can be used by a corporate company is where the company is investing in some project which is expected to finalize within a short interval of time, the company can opt to finance its working capital trough bridge financing. In the case of individuals, bridge financing can be used by a real estate investor. There exists a time lag between the date of project completion, and the date the investor will be able to sell that property. During this time lag period, the property developer can use bridge loan to finance his/her operational activities. (Dennis et all, 2000)
A term loan is defined as a loan facility from a bank for a precise amount that has a stipulated repayment schedule as well as a floating interest rate. (Assender, 2000) In simple language, a Term loan is essentially an installment loan, e.g. asset financing loan. Term loans maturity period extends from between a period of one year to ten years. Most term loans are used by businesses to fund the acquisition of fixed assets, for example, production equipment. The borrower can agree to repay back the loan on periodic equal/unequal installments or a onetime lump sum payment upon maturity, what is commonly referred to as bullet payment.
There are two main types of Term loans, namely;
An amortizing Term loan, and
An institutional Term loan.
An amortizing Term loan: Also commonly referred to as A – Term loan or TLa. This is a term loan which has a progressive repayment program or schedule that regularly runs for six years or less. These loans are usually syndicated to banks together with revolving credits which are part of a bigger syndication. (Coffey, 2000) A – Term loans are becoming increasingly uncommon, as issuers dodged the less obliging bank market and instead turned to institutional investors for the bigger portion or most of their funded loans.
An institutional Term loan (B –Term, C – Term, or D – Term loan) is a term loan facility carved out for non bank or institutional investors. (Allen, 1990).
Documentation For a Syndicated Loan
The process starts when the arranger awards a mandate to the arranger via a mandate/commitment letter.
The mandate letter normally will be signed together with a term sheet. The term sheet details the proposed financing before the transaction documentation is signed.
Then the arranger with the help of the borrower prepares the information memorandum, i.e. a document that details the nature of the borrowers business, its management structure and books of accounts, as well syndicated loan agreement is prepared, that is, a documentation which clearly stipulates the terms and conditions with which the syndicated loan facility has been made available to the borrower.
Then fee letters are paid out by the borrower and details of the fees paid out put up in a different letter to maintain confidentiality.
Form Of Syndicated Loan Transfer
The most common forms of syndicated loan transfers are:
Parties To Loan Syndication
Is an institution or individual that seeks to raise finances by entering into an obligatory contract to repay those funds together with accrued interest over those funds. Borrower mandates a lender to act as the lead arranger for the transaction.
The Lead Arranger;
Is the party responsible for arranging the finances. Lead arranger coordinates all activities related to a particular syndication transaction from the initial stages until when the funds are disbursed to the borrower. The lead arranger will most likely have an already established relationship with the borrower.
Functions of the Lead Arranger (Thames International bank plc) in a syndication deal:
Puts together a syndicate/consortium of banks to provide the loan facility. It is the responsibility of the lead arranger to sell the loan to the participating banks.
Helps the borrower in structuring the project and setting up the loan facility, drafts the information memorandum and comes up with a plan that will enhance raising the funds within a reasonable time schedule. Information memorandum contains a detailed description of the borrowers business, its management structure, financial statements, as well as all the parameters of the loan facility.
Offers the first point of call where any arising questions and problems can be channeled to thereby minimizing any chances of the whole deal stalling midway
To enable easy administration of the loan facility on a daily basis, one bank from the bank syndicate is appointed to act as the agent. The agent acts as an agent for the banks, not for the borrower.
Functions of the Agent (Iberian Finance Corporation UK Plc):
Point of contact: - maintains constant communication with the borrower thereby representing views of the syndicate adequately to the borrower.
Monitoring function: - ensures that the borrower complies with the terms and conditions of the loan facility as per the syndicate loan agreement.
Offers a channel through which payments to/from the borrower/banks is effected. The borrower makes any form of payment as per the loan agreement (both interest and principal payments) to the agent, who then passes the payments to the appropriate banks/lenders. Similarly, the banks advance the borrower any payment through the agent. (O’Sullivan, 1922)
Performs function of a security trustee, i.e. he acts as the custodian of the loan facility documents.
Been appointed by the banks, he acts as an agent for the banks, not for the borrower, hence performs any other duty regarding the loan facility on behalf of the syndicate/lenders.
Offers a channel of communication between the banks and the borrower. E.g. if the borrower wants an amendment of an amendment of any clause in the syndicate loan agreement, he does it through the agent who in turn passes the same information to the banks. This, in turn, saves a lot of time and unnecessary bureaucracy to both the banks and the borrower.
Performs any other function regarding the general administration and management of the loan facility. He is mandated with the role of informing the syndicate/banks on the progress of the intended project to be financed by the loan. He from time to time calls for a review meeting, where the banks and the borrower could attend.
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It is also the duty or obligation of the agent to circulate audited financial statements of the borrower to the participating banks.
A group of financial entities committing to participate in the syndicate deal by contributing
A certain proportion of the loan amount.
Key provisions that Tyne-tees bank Plc (participating bank) should seek to be included in the loan agreement to protect its interests include:
Should ensure that the nature of its loan interest is in such an approach that it is a direct creditor to the borrower.
Common law rights: The loan agreement should provide that debtor-creditor contractual relationship exists.
The loan agreement should provide that Tyne-tees bank plc can claim any capital loss incurred on the basis of its percentage contribution to the loan facility and that it can claim Tax benefits. Such include among others funding losses and capital reserves increase. (Clarke et all, 1982)
Insolvency of the administrative agent should not affect the interest of every lender with regard to duties of the borrower to the lender. (Altman et all, 2000)
The agreement should provide that any legal opinion is for Tyne tees banks’ direct benefit, as well as a benefit to the administrative agent, and that any opinion given with regards to the loan facility can be reliable.
The agreement should provide that assignment(that is, transfer of rights but not obligations) should be absolute, that is, whole of the debt outstanding on the existing lender, inform of writing and signed too by the existing lender, as well as notified inform of writing to the lender. (Sec 136 of the law of property Act, 1925)
The loan agreement should provide that Tyne Bank, either alone or together with the other participating banks, can cause/move a motion to amend (or prevent the amendment of) any clause in the agreement.
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