LOAN SYNDICATION AND LOAN SYNDICATION AND

CONSORTIUM FINANCECONSORTIUM FINANCE

LOAN SYNDICATIONLOAN SYNDICATIONIt is a loan extended by a group

of banks to a corporate borrower.It is a single loan arrangement.Lead bank will be selected by

the group of banks.Usually term loans are provided.Firm may avail the service of a

merchant banker to arrange for loan syndication.

Steps involved in loan Steps involved in loan syndicationsyndication

Important roles in syndicated Important roles in syndicated loansloansLead Manager: The lead manager

is a bank that is awarded the mandate by the prospective borrower and is responsible for placing the syndicated loan with the other banks and ensures that the syndication is fully subscribed. They are entitled to the arrangement fee and undergo a reputation risk during this process.

………………....Participating Bank:  This bank

participates in the syndication by lending a portion of the total amount required. It is entitled to receive the interest and the participation fee. But it, however, faces risks such as: -* Borrower credit risk* Passive approval and complacency

Underwriting Bank: It is the bank that commits to supplying the funds to the borrower - if necessary from its own resources if the loan is not fully subscribed. The lead manager or another bank may play this role. Not all syndications are underwritten. The risk is that the loan may not be fully subscribed.

Facility Manager / Agent: This bank takes care of all the administrative arrangements over the term of loan, e.g., disbursements, repayments, compliance. This bank acts on behalf of all the banks participating. This may be either the lead manger or the underwriting bank.

Syndicated loans used Syndicated loans used for……….for……….Working capital credit (refinancing

of small lines of credit, etc.);Export finance (including ECAs);Capital goods financing (machinery,

etc.);Mergers & Acquisitions;Project finance (SPVs, structured

according to cash flow);Stand-by facilities;Trade finance (Letters of credit,

promissory notes, forfaiting);Guarantees (supply, service, etc.)

Advantages Advantages Allows the borrower to access

from a diverse group of financial institutions.

Borrowers can raise funds more cheaply in the syndicated loan market than by borrowing the same amount of money through a series of bilateral loans. This cost saving increases as the amount required rises

Disadvantages Disadvantages Each bank needs to come to an

understanding of the business and how its financial activities are conducted.

A comfort level must be established on both sides of the transaction, which requires time and effort.

Negotiating a document with one bank can take days. To negotiate documents with four to five banks separately is a time-consuming, inefficient task.

Staggered maturities must be monitored and orchestrated.

multiple lines require an inter-creditor agreement among the banks, which takes additional time to negotiate.

CONSORTIUM FINANCECONSORTIUM FINANCEUnder consortium financing,

several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and follow-up exercises, these banks have a common agreement between them, the process is somewhat similar to loan syndication.