LOAN SYNDICATION

There has been a sharp rise in loan off-take recently, with the credit growth being 25% higher than the
previous year. As India Inc. goes on a capital expenditure and expansion spree, the financial system is
witnessing a subtle change in the way credit is mopped up. More and more corporates are looking at loan
syndications - a common phenomenon in the West.
"Syndication is an arrangement where a group of banks, which may not have any other
business relationship with the borrower, participate for a single loan."
"A syndicated facility is a lending facility, defined by a single loan arrangement, in which several or many
banks participate."
The standard theory for why banks join forces in a syndicate is risk diversification. The banks in the
syndicate share the risk of large, indivisible investment projects. Syndicates may also arise because
additional syndicate members provide informative opinions of investment projects or additional expertise
after the funding has been extended.
In other words - if a company wants a huge amount as a loan for expansion or any other purpose, say
when Reliance or ITC wants money, loans are got from the banks. But generally, its got from a single
bank and that single bank alone shares the risk. Take the case of funding a rocket launch - if the launch is
a failure, then the bank which funds for it may become bankrupt. But in syndication, many banks come
together and fund a single project, hence sharing the risks. This also assists in getting competitive interest
rates for the banks. Generally, when a group of banks get together, they select a lead bank which handles
all the dealings with the company, such as negotiating the interest rates, and hence a deal is signed
between the company and the banks. Loan syndication is basically done to share the total loss or liability.
Typically, syndicated loans are structured as term loans or operating revolvers. However, they may also
include tranche or segmented structures, letters of credit, acquisition facilities, construction financing,
asset-based structures, project financing and trade finance.
WHEN DOES A CORPORATE GO FOR SYNDICATION?
Corporates opt for syndication when:

The borrower wants to raise large amount of money quickly and conveniently

The amount exceeds the exposure limits or appetite of any one lender

The borrower does not want to deal with a large number of lenders

Traditionally, loan syndication was practiced in Europe. Euro syndicated loan is usually a
floating rate loan with fixed maturity, a fixed draw down period and a specified repayment
schedule. One, two or even three banks may act as lead managers and distribute the loan among
themselves and other participating banks. One of the lead banks acts as the agent bank and administers
the loan after execution, disbursing funds to the borrower, collecting and distributing interest payments
and principal repayments among lead banks, etc. A typical Euro credit would have maturity between 5 to
10 years, amortization in semi-annual installments, and interest rate reset every three or six months with
reference to LIBOR.

Syndicated loans can be structured to incorporate various options, e.g., a drop lock feature converts the
floating rate loan into a fixed rate loan if the benchmark index hits a specified floor. A multi-currency option
allows the borrower to switch the currency of denomination on a roll-over date. Security in the form of
government guarantee or mortgage on assets is required for borrowers in developing countries like India.
Some of the important roles in Syndicated Loans include: Arranger / Lead 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.

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.

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

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.

STAGES INVOLVED IN THE PROCESS

Premandate Phase: The prospective borrower may liaise with a single bank or it may invite
competitive bids from a number of banks. The lead bank identifies the needs of the borrower, designs an
appropriate loan structure, develops a persuasive credit proposal, and obtains internal approval. The
mandate is created. The documentation is created with the help of specialist lawyers.

Placing the Loan: The lead bank can start to sell the loan in the market place. The lead bank needs to
prepare an information memorandum, term sheet, and legal documentation and approach selected banks
and invite participation. The lead manager carries out the negotiations and controversies are ironed out.
The syndication deal is closed, including signing of the mandate.

Post Closure Phase: The agent now handles the day-to-day running of the loan facility.
BENEFITS OF LOAN SYNDICATIORS FOR BORROWERS
Syndicated loans provide borrowers with a more complete menu of financing options. In effect, the
syndication market completes a continuum between traditional private bilateral bank loans and publicly
traded bond markets. This has resulted in a more competitive corporate finance market, which has
permitted issuers to achieve more market-oriented and cost-effective financing
The Housing Development Finance Corporation (HDFC) has signed a loan agreement for $200 million
with International Finance Corporation (IFC), the private sector development arm of the World Bank
group. The loan would be available to HDFC in two tranche - the first part of $100 million to be lent
directly by IFC as a multilateral tranche, and the second part as a syndicated tranche, said a news
release from the housing finance company. The first tranche has bullet maturity at the end of 8 years, the
rate of interest being six-month LIBOR plus 100 basis points. The second tranche would be syndicated by
IFC and would be placed with leading international banks.
The main objective of the loan was broad-basing the medium-to-long-term funding sources for HDFC and
also to reduce the overall cost of funding. The proceeds of the loan will be utilized for lending to
individuals across the country for residential housing. HDFC is in the process of finalising suitable risk
management arrangements to hedge against foreign exchange fluctuations.
DISADVANTAGES
Managing multiple bank relationships is no small feat. 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. Moreover, multiple lines require an intercreditor agreement among the banks, which takes additional time to negotiate.

CONCLUSION
One advantage of syndication loans is that this market allows the borrower to access from a diverse
group of financial institutions. In general, 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.