A syndicated loan is offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. Each lender is expected to provide a defined percentage of the loan and receives the same percentage of repayments in addition to interest payments. Typically there is a lead bank or underwriter of the loan, known as the ‘arranger’, whose responsibility it is to structure the loan transaction. This lender may put up a proportionally bigger share of the loan, or perform duties like dispersing cash flows amongst the other syndicate members and administrative tasks.
The parties to a syndicated loan transaction usually include:
- Arranger/Lead Bank responsible for structuring the loan;
- Underwriting Bank (optional) which guarantees that the entire loan amount would be made available to the Borrower;
- Participating Banks/Lenders who lend a fraction of the total amount required;
- Facility Agent responsible for the administration of the loan e.g. disbursements, repayments etc;
- Borrower who seeks the loan and is responsible for repayment of principal and interests; and
- Security Trustee responsible for holding the security for the loan on behalf of the lenders.
Types of Syndications
There are three types of syndications:
- Underwritten deal: An underwritten deal is one for which the arranger guarantees the entire loan amount and then proceeds to syndicate the loan. If the arranger cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors.
- Best-efforts syndication: This is where the arranger commits to underwrite less than the entire amount of the loan.
- Club deal: a smaller loan that is pre-marketed to a group of relationship lenders. The arranger is generally a first among equals in this type of syndication.
- Once an Arranger is appointed, the syndication process starts. The Arranger prepares a document usually called an Information Memorandum describing the terms of the transaction; executive summary; investment considerations; a list of terms and conditions; an industry overview; and a financial model.
- As soon as this is completed, invitations are sent out to banks to participate in the syndication. Once respective commitments are obtained from the banks, confidentiality agreements are sent to the banks for execution after which drafts of the Loan Documentation are circulated amongst the banks for review.
- The Loan documentation is eventually executed by all parties and the process of perfection immediately commences at the Stamp Duties Office; Lands Registry; Ship Registry; and Corporate Affairs Commission depending on the type of asset used as security.
- Upon the execution of the Loan documentation, the Borrower would need to satisfy condition precedents as stipulated in the Agreements before disbursement of the loan can be made by the Facility Agent. There may also be conditions subsequent in the Agreements which the Borrower would be bound to comply with after disbursement of the facility. The conditions subsequent usually entail perfection of the security at the relevant government agencies.
- The Arranger, Facility Agent, Lenders and the Security Trustee are entitled to specific type of fees for their respective roles in a syndication transaction. The Security Trustee’s fee is usually an annual fee which becomes immediately payable upon the execution of the transaction documents and on the anniversary of the execution date of the transaction documents. The Security Trustee’s fee is also payable in advance and net of all taxes.
- In commercial terms, the syndication is a single loan transaction. The liabilities of the lenders are however independent of each other in legal terms. A single lender in syndication transactions cannot take enforcement action without majority votes of the lenders in favour of such enforcement action. The security is also shared on a pari-passu basis where each lender ranks as per their contribution and is paid pro-rata of all payments or recovery.
Advantages of syndication to lenders
- Share risks collectively;
- Collective access to security;
- Participation in transaction even in small proportions;
- Developing a new customer base;
- Formal process to finalise deals in place;
- Assured that security is not vested in other lenders where there is Security Trustee involved;
- Lenders are confident that their interests in security are protected;
- The lenders are freed of time and resources which would otherwise have been deployed to perfect the security where a Security Trustee is involved.
Advantages of syndication to borrowers
- Access to multiple resources;
- Ability to deal with Special Purpose Vehicles;
- Ease of dealing with other parties under harmonised documentation;
- Fewer disclosure requirements;
- Competitive fees and margins due to multi bank involvement;
- New banking relationship;
- Market presence;
- Single and uniform security for all lenders;
- Entry and exit of lenders without the need to transfer security;
- Safeguarding of the Borrower’s residual interest where a Security Trustee is involved;
- Liaising with intermediaries (Arranger, Facility Agent and Security Trustee) who serve as the interface between Borrower and lenders.