Syndicated Loans

JLR, which was acquired by Tata Motors from FordMotor for $2.3 billion in March 2008In Oct. 2009, it secured £500m of new finance, including a £175m loan with the State Bank of India. The company has also won a $90m (£57m) export financing facility with ABC International Bank.The remaining funding has been made with Standard Chartered, Bank of Baroda, and Burdale Financial Limited, a subsidiary of the Bank of Ireland

Syndicated Loan

Syndicated Loan - Definition

A syndicated facility is a lending facility, defined by a single loan agreement, in which several or many bank participate

Why Syndicated Loan?

A borrower wants to raise relatively large amount of money quickly and convenientlyThe amount exceeds the exposure limits or appetite of any one lenderBorrower does not want to deal with a large number of lenders

Syndicated loan - market

One of the largest markets… Most flexible market Size

• 1980 - 88 bn• 1989 - 736 bn• 1999 - 1800 bn• 2004 - 3200 bn

Global Syndicated Loan Markets

Category of borrowers Coporates 75% Financial institutions 20% Others 5%

Regionwise USA 60% EUROPE 30% Asia Pacific 5% Others 5%

Global Syndicated Loan Markets

Market & Centre

1. US Market - New York2. European Market - London3. Asian Market – Hong Kong

Syndicated Loan - Features

Two or more banks (the syndicate of Lenders) contract with a borrower to provide credit on common Terms and conditions Governed by a common document.Multi-bank transaction, each bank acting severally.Although common documentation, a bank hasultimately, the individual right to take legal action against borrower

Syndicated Loan - Features

Interest usually accrues at a variable or floating rate and is reset periodically, at agreed intervals, usually at borrower’s choice.

Usually of medium term maturity, 3-10 years. Banks participate on common terms and conditions, but not necessarily in equal amounts

Lead bank/Manager

Bank CBank BBank A

Borrower

Under writer

Lead Manager

The bank that is awarded the mandate by the prospective borrower It is responsible for placing the syndicated loan with other banks and It ensures that the syndication is fully subscribed Eligible for arrangement fee

Underwriting bank

Bank that commits to supplying the funds to the borrower – if necessary from its own resources if the loan is not fully subscribed

Risk factor Loan may not be fully subscribed Not all syndicated loans are ‘underwritten’

Participating bank

The bank that participates in the syndication by lending a portion of the total amount required

Interest income and participation fees

Participating bank

Risks• Credit risk of the borrower – normal• Participating bank may be led to into passive approval and complacency (when many high profile banks cannot be wrong?)• Funding risk: mismatch of inflows and outflows

Dealing with single bank - Single contact point & Single set of documents

Access to large amount of funds

Sophisticated investor base

Advantages to the Borrower

Relatively lower price & finer terms and highly flexible

Access to wide range of banks

Greater speed & reasonable certainty of obtaining funds – simpler than other ways of raising capital ( issuing of

bonds or equity)

Advantages to the Borrower

Advantages to the lead bank

Arrangement fees – income without committing capital

Enhancing banks reputation

Enhancing the banks relationship with the client

Diversification of risks (exposure norms prescribed by Central Banking authority)

Access to lending opportunities with low marketing cost

Opportunities to participate future syndications

Advantages to participating banks

In case of borrower runs into difficulties, participant banks have equal treatment – no disadvantage of the size vis-à-vis dominant bigger banks Recognition Return by way of interest & fees Transferability

Advantages to participating banks

Term Loans

Revolving Credit

Standby Facility

Instruments

Stages…..

The Prospective Borrower May Liaise With A Single Bank Or It May Invite Competitive Bids From A Number Of Banks.The Lead Bank Needs To:

Identify The Need Of The BorrowerDesigning Appropriate StructureDevelop A Persuasive Proposal

On Approval – Award Of Mandate

Interest Spread Depends Upon :

Risk -Whether Sovereign Or Public / Joint Venture Or Private Sector

Industry Or Activity Of The Company

Credit Rating Of The Country

Credit Rating Of The Borrower/Group

Period / Average Life Of The Loan - 3-5-7 Years?

Repayment/ Structure - Whether Bullet Or Amortisation?

Pricing…..

¤ Reserve clause - increased cost – revision of interest rate

¤ Default clause – right to recall – paripasu charge

¤ Jurisdiction for settlement of disputes

¤ Availability of draw down – subject to availability of funds

¤ Key documentation clauses

¤ Material adverse change clause - negative lien

¤ Expiry date

Term Sheet …..

¤ Preparation by Law Firm

¤ Incorporation of Terms – Specific / General – role of each party clearly defined

¤ Revision, Negotiation & Finalisation

¤ LMA Recommended Form of Primary Documents (Loan Market Assn, London)

Documentation…..

WHY:

¤ Liquidity & Trading Profits

¤ Exposure Management

¤ Reduction & Diversification of Risks

¤ Regulatory Constraints

¤ Asset Building and Relationship

Secondary Market Transfers…..

Thank you