GUIDE TO SYNDICATED LOANSCONTENTS Clause Page 1. Introduction ........................................................................................ 1 2. Types Of Facility Commonly Syndicated...................................................... 1 3. Parties To A Syndicated Loan................................................................... 2 4.

Documentation For A Syndicated Loan........................................................ 4 5. Timing .............................................................................................. 5 6. Syndication Loan Transfers...................................................................... 5GUIDE TO SYNDICATED LOANS 1. INTRODUCTION Borrowing by way of a loan facility can provide a borrower with a flexible and efficient source of funding. If a borrower requires a large or sophisticated facility or multiple types of facility this is commonly provided by a group of lenders known as a syndicate under a syndicated loan agreement. A syndicated loan agreement simplifies the borrowing process as the borrower uses one agreement covering the whole group of banks and different types of facility rather than entering into a series of separate bilateral loans, each with different terms and conditions. The purpose of this note is to provide guidance on various aspects of a syndicated loan transaction, focusing on the following: (i) the types of borrowing facilities commonly seen in a syndicated loan agreement; (ii) a description of the parties to a syndicated loan agreement and an explanation of their role; (iii) a brief explanation of the documentation entered into by the parties; (iv) the time line for a typical syndicated loan transaction; and (v) a description of the common methods used by lenders to transfer syndicated

loan participations. The guidance in this note is given on the basis of a typical syndicated loan transaction undertaken in the European loan market as envisaged in the LMA Primary Loan documents and governed by the laws of England. This note is not intended to provide a detailed explanation of the provisions of the LMA Primary Loan Agreements guidance on this is set out in the "Users Guide to the Recommended Form of Primary Documents" published by the LMA and available to LMA members on the LMA website. 2. TYPES OF FACILITY COMMONLY SYNDICATED Two types of loan facility are commonly syndicated: term loan facilities and revolving loan facilities. 2.1 Term Loan Facility : Under a term loan facility the lenders provide a specified capital sum over a set period of time, known as the "term". Typically, the borrower is allowed a short period after executing the loan (the "availability" or "commitment" period), during which time it can draw loans up to a specified maximum facility limit. Repayment may be in instalments (in which case the facility is commonly described as "amortising") or there may be one payment at the end of the facility (in which case the facility is commonly described as having "bullet" repayment terms). Once a term loan has been repaid by the borrower, it cannot be re-drawn.- 2 2.2 Revolving Loan Facility: A revolving loan facility provides a borrower with a maximum aggregate amount of capital, available over a specified period of time. However, unlike a term loan, the revolving loan facility allows the borrower to drawdown, repay and re-draw loans advanced to it of the available capital during the term of the facility. Each loan is borrowed for a set period of time, usually one, three or six months, after which time it is technically repayable. Repayment of a revolving

loan is achieved either by scheduled reductions in the total amount of the facility over time, or by all outstanding loans being repaid on the date of termination. A revolving loan made to refinance another revolving loan which matures on the same date as the drawing of the second revolving loan is known as a "rollover loan", if made in the same currency and drawn by the same borrower as the first revolving loan. The conditions to be satisfied for drawing a rollover loan are typically less onerous than for other loans. A revolving loan facility is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit facility, swingline facility or overdraft facility within the terms of a revolving credit facility. This is often achieved by creating a sublimit within the overall revolving facility, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities. 2.3 General: Syndicated loan agreements may contain only a term or revolving facility or they can contain a combination of both or several of each type (for example, multiple term loans in different currencies and with different maturity profiles are not uncommon). There can be one borrower or a group of borrowers with provision allowing for the accession of new borrowers under certain circumstances from time to time. The facility may include a guarantor or guarantors and again provisions may be incorporated allowing for additional guarantors to accede to the agreement. 3. PARTIES TO A SYNDICATED LOAN The syndication process is initiated by the borrower, who appoints a lender through the grant of a mandate to act as the Arranger (also often called a Mandated Lead Arranger) on the deal. There is often more than one Arranger on any transaction but for the

purposes of this note we will refer to this role in the singular. The Arranger is responsible for advising the borrower as to the type of facilities it requires and then negotiating the broad terms of those facilities. By the very nature of this appointment, it is likely that the Arranger will be a lender with which the borrower already has an established relationship, although it does not have to be. At the same time the Arranger is negotiating the terms of the proposed facility, one of the Arrangers appointed by the Borrower to act as Bookrunner also starts to put together a syndicate of banks to provide that facility. Syndication is often done in stages, with an initial group of lenders agreeing to provide a share of the facility. This group of lenders is often referred to as Co-Arranger, - 3 although other titles may be used - however, we shall continue to refer to this group of lenders as Co-Arrangers for the purposes of this note. The Co-Arrangers then find more lenders to participate in the facility, who agree to take a share of the CoArrangers' commitment. To facilitate the process of administering the loan on a daily basis, one bank from the syndicate is appointed as Agent. The Agent who is appointed acts as the agent of the lenders not of the borrower and has a number of important functions: - Point of Contact: (maintaining contact with the borrower and representing the views of the syndicate) - Monitor: (monitoring the compliance of the borrower with certain terms of the facility) - Postman and Record-keeper: (it is the agent to whom the borrower is usually required to give notices) - Paying Agent: (the borrower makes all payments of interest and repayments of principal and any other payments required under the Loan Agreement to the Agent. The Agent passes these monies back to the banks to whom they are due.

Similarly the banks advance funds to the borrower through the Agent). The terms of a syndicated loan agreement empower the Agent to undertake the roles described above in return for a fee. Any decisions of a material nature (for example, the granting of a waiver) must usually be taken by a majority, if not by the whole syndicate. Whilst the Agent carries the standard duties and responsibilities of any agent under English Law, the facility agreement will contain a number of exculpatory provisions to limit the scope of the Agent's relationship with the syndicate lenders and with the borrower. If the syndicated loan is to be secured, a lender from the syndicate is usually appointed to act as Security Trustee to hold the security on trust for the benefit of all the lenders. The duties imposed upon the Security Trustee are typically more extensive than those of an agent. In large syndicates, it is sometimes decided that some decision making power should be delegated to the majority from time to time (often referred to as the 'majority lenders' or 'instructing group'). This group usually consists of members of the syndicate at the relevant time that hold a specified percentage of the total commitments under the facility. By delegating some of the decision-making, the mechanics of the loan are able to work more effectively than if each and every member of the syndicate had to be consulted and subsequently reach unanimous agreement on every request from the borrower.- 4 4. DOCUMENTATION FOR A SYNDICATED LOAN 4.1 Mandate Letter: The borrower appoints the Arranger via a Mandate Letter (sometimes also called a Commitment Letter). The content of the Mandate Letter varies according to whether the Arranger is mandated to use its "best efforts" to arrange the required facility or if the Arranger is agreeing to "underwrite" the required

facility. The provisions commonly covered in a Mandate Letter include: (i) an agreement to "underwrite" or use "best efforts to arrange"; (ii) titles of the arrangers, commitment amounts, exclusivity provisions; (iii) conditions to lenders' obligations; (iv) syndication issues (including preparation of an information memorandum, presentations to potential lenders, clear market provisions, market flex provisions and syndication strategy); and (v) costs cover and indemnity clauses. 4.2 Term Sheet: The Mandate Letter will usually be signed with a Term Sheet attached to it. The Term Sheet is used to set out the terms of the proposed financing prior to full documentation. It sets out the parties involved, their expected roles and many key commercial terms (for example, the type of facilities, the facility amounts, the pricing, the term of the loan and the covenant package that will be put in place). 4.3 Information Memorandum: Typically prepared by both the Arranger and the borrower and sent out by the Arranger to potential syndicate members. The Arranger assists the borrower in writing the information memorandum on the basis of information provided by the borrower during the due diligence process. It contains a commercial description of the borrower's business, management and accounts, as well as the details of the proposed loan facilities being given. It is not a public document and all potential lenders that wish to see it usually sign a confidentiality undertaking. Syndicated Loan Agreement: The Loan Agreement sets out the detailed terms and conditions on which the Facility is made available to the borrower. 4.4 Fee Letters: In addition to paying interest on the Loan and any related bank expenses, the borrower must pay fees to those banks in the syndicate who have performed

additional work or taken on greater responsibility in the loan process, primarily the Arranger, the Agent and the Security Trustee. Details of these fees are usually put in separate side letters to ensure confidentiality. The Loan Agreement should refer to the Fee Letters and when such fees are payable to ensure that any non-payment by the borrower carries the remedies of default set out in the Loan Agreement.- 5 5. TIMING Whilst the principal documents required for the provision of a syndicated loan are the same, the timing of producing such documentation often depends on whether or not the loan is being underwritten (see diagrams below). Typical Timetable of a Syndicated Loan - not underwritten Typical Timetable of a Syndicated Loan - underwritten 6. SYNDICATION LOAN TRANSFERS 6.1 Why sell a participation in a syndicated loan? A lender under a syndicated loan may decide to sell its commitment in a facility for one or more of the following reasons: 6.1.1 Realising Capital: if the loan is a long-term facility, a lender may need to sell its share of the commitment to realise capital or take advantage of new lending opportunities; 6.1.2 Risk/Portfolio Management: a lender may consider that its loan portfolio is weighted with too much emphasis on a particular type of borrower or Loan or may wish to alter the yield dynamics of its loan portfolio. By selling its commitment in this loan, it may lend elsewhere, thus diversifying its portfolio; 6.1.3 Regulatory Capital Requirements: a bank's ability to lend is subject to both internal and external requirements to retain a certain percentage of its capital as cover for its existing loan obligations. These are known as "Regulatory

Capital Requirements"; and Mandate from Borrower to Arranger Syndication Signing/Drawdown Term Sheet Mandate Letter Invitation Information Memorandum Draft Facility Agreement Allocations of Participations Facility Agreement Fee Letters Conditions Precedent Mandate from Borrower to Arranger Signing/Drawdown Syndication Term Sheet Mandate Letter Facility Agreement (signed by Arrangers only) Fee Letters Conditions Precedent Invitation Information Memorandum Allocations of Participations Global Transfer Certificate/ Syndication Agreement- 6 -

6.1.4 Crystallise a loss: the lender might decide to sell its commitment if the borrower runs into difficulties - specialists dealing in distressed debts provide a market for such loans. However, before the lender can go ahead and transfer its participation in a syndicated loan, it must consider the implications of the methods of transfer available to it under the Syndicated Loan Agreement. 6.2 Forms of Transfer The most common forms of transfer to enable a lender to sell its loan commitment are: (i) Novation (the most common legal mechanic used in transfer certificates scheduled to loan agreements); (ii) legal assignment; (iii) equitable assignment; (iv) funded participation; and (v) risk participation. Methods (i) and (ii) result in the lender disposing of its loan commitment with the new lender assuming a direct contractual relationship with the borrower, whilst methods (iii) to (v) result in the lender retaining a contractual relationship with the borrower. Each of these methods is now examined in more detail. 6.2.1 Novation: Novation is the only way in which a lender can effectively 'transfer' all its rights and obligations under the Loan Agreement. The process of transfer effectively cancels the existing lender's obligations and rights under the loan, while the new lender assumes identical new rights and obligations in their place. Therefore the contractual relationship between the transferring lender and the parties to the loan agreement cease and the new lender enters into a direct

relationship with the borrower, the agent and the other lenders. At the time the new lender becomes a party to the Loan Agreement the loan could be fully drawn, particularly if it is a term loan facility. However, particularly in the case of a revolving credit facility the new lender could be assuming obligations to advance monies to the borrower. The borrower has to be a party to the novation process. The documentation required to effect a novation of a participation in a syndicated loan depends on the provisions in the Loan Agreement. However most Loan Agreements (including the LMA recommended form) have a transfer certificate attached as a schedule that operates by way of novation. There is also a provision in the Loan Agreement where all parties (including the borrower) agree that provided the other conditions to any transfer set out in the Loan Agreement - 7 are complied with they consent to the novation effected by the execution of the transfer certificate. The Agent, the new lender and the existing lender are the only parties usually required to execute the transfer certificate. 6.2.2 Legal Assignment: Assignment involves the transfer of rights, but not obligations. For a legal assignment, s.136 of the Law of Property Act 1925 provides that the assignment must be: absolute (i.e. the whole of the debt outstanding to the existing lender); in writing and signed by the existing lender; and notified in writing to the borrower. If any element of this requirement is missing, the assignment is likely to be equitable (see 6.2.3 Equitable Assignment). In the context of the syndicated loan, a legal assignment will transfer all of the existing lender's rights under the Loan Agreement (including the right to sue

the borrower and the right to discharge the assigned debt) to the new lender. The obligation of the existing lender to provide funds to the borrower cannot be transferred by legal assignment and thus remains with the existing lender. The new lender pays the existing lender any funds due under the loan and the existing lender sends those funds on to the Agent, who then passes such funds on to the borrower. 6.2.3 Equitable Assignment: As mentioned above, an equitable assignment is created when one or more of the provisions of section 136 of the Law of Property Act 1925 is not met, provided the intention to assign is present between the parties. In contrast to a legal assignment, the new lender, as the equitable assignee, must join the existing lender, as assignor, in any action on the debt. The most significant difference between a legal and equitable assignment arises if the borrower is not notified of the assignment. If the borrower is not notified of the assignment, the new lender will be subject to all equities (for example, mutual rights of set-off) which arise between the existing lender and the borrower, even after the loan has been assigned. 6.2.4 Funded participation: Under a funded participation the existing lender and the participant enter into a contract providing that in return for the participant paying the existing lender an amount equal to all or part of the principal amount of the Loan made by the existing lender to the borrower ("the deposit"), the existing lender agrees to pay to the participant all or the relevant share of principal and interest received by the existing lender from the borrower in respect of that amount.- 8 A funded participation agreement is made between the existing lender and the

participant. This creates new contractual rights between the existing lender and the participant which mirror existing contractual rights between the existing lender and the borrower. However this is not an assignment of those existing rights and the existing lender remains in a direct contractual relationship with the borrower. In a funded participation, the participant agrees that its deposit will be serviced (in terms of payment of interest) and repaid only when the borrower services and repays the loan from the existing lender. The participant has effectively taken on the risk of the first loan. The funded participation agreement must ensure that the existing bank is put in funds by the participant in time to meet the borrower's demands for drawdown in order to remove the risk. The existing lender remains liable under the Syndicated Loan Agreement. 6.2.5 Risk Participation: Risk participation is a form of participation which acts like a guarantee. The risk participant will not immediately place any money with the existing lender, but will agree, for a fee, to put the existing lender in funds in certain circumstances (typically on any payment default by the borrower). Risk participation may be provided by a new lender as an interim measure before it takes full transfer of a loan. No borrower consent is required for either a Funded Participation or a Risk Participation, so this process can be confidential. There is no direct contract between the new lender and the borrower but the participant usually obtains rights of subrogation, therefore if the participant has to pay after the borrower defaults, the participant gains the right to step into the existing lender's shoes and pursue all remedies of the existing lender against the borrower.

Syndicated loan
From Wikipedia, the free encyclopedia

The examples and perspective in this article may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (April 2010)

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks orinvestment banks known as arrangers. The syndicated loan market is the dominant way for corporations in the U.S. and Europe to tap banks and other institutional financial capital providers for loans. The U.S. market originated with the large leveraged buyout loans of the mid-1980s,[1] and Europe's market blossomed with the launch of the euro in 1999. At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowersissuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins above the relevant LIBOR in the U.S. and UK, Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions. In the U.S., corporate borrowers and private equity sponsors fairly even-handedly drive debt issuance. Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, who, in turn, determine many of the standards and practices of loan syndication.[2]

Loan Market Overview[edit]

The retail market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors.[3] The balance of power among these different investor groups is different in the U.S. than in Europe. The U.S. has a capital market where pricing is linked to credit quality and institutional investor appetite. In Europe, although institutional investors have increased their market presence over the past decade, banks remain a key part of the market. Consequently, pricing is not fully driven by capital market forces. In the U.S., market flex language drives initial pricing levels. Before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit. After this market read, the arrangers will launch the deal at a spread and fee that it thinks will clear the market. Until 1998, this would have been it. Once the pricing, or the initial spread over a base rate which is usually LIBOR, was set, it was set, except in the most extreme cases. If the loans were undersubscribed, the arrangers could very well be left above their desired hold level. Since the 1998 Russian financial crisis roiled the market, however, arrangers have adopted market-flex language, which allows them to change the pricing of the loan based on investor demandin some cases within a predetermined rangeand to shift amounts between various tranches of a loan, as a standard feature of loan commitment letters. As a result of market flex, loan syndication functions as a book-building exercise, in bond-market parlance. A loan is originally launched to market at a target spread or, as was increasingly common by 2008 with a range of spreads referred to as price talk (i.e., a target spread of, say, LIBOR+250 to LIBOR+275). Investors then will make commitments that in many cases are tiered by the spread. For example, an account may put in for $25 million at LIBOR+275 or $15 million at LIBOR+250. At the end of the process, the arranger will total up the commitments and then make a call on where to price the paper. Following the example above, if the paper is vastly oversubscribed at LIBOR+250, the arranger may slice the spread further. Conversely, if it is undersubscribed even at LIBOR+275, then the arranger will be forced to raise the spread to bring more money to the table. In Europe, banks have historically dominated the debt markets because of the intrinsically regional nature of the arena. Regional banks have traditionally funded local and regional enterprises because they are familiar with regional issuers and can fund the local currency. Since the Eurozone was formed in 1998, the growth of the European leveraged loan market has been fuelled by the efficiency provided by this single currency as well as an overall growth in merger & acquisition (M&A) activity, particularly leveraged buyouts due to private equity activity. Regional barriers (and sensitivities toward consolidation across borders) have fallen, economies have grown and the euro has helped to bridge currency gaps. As a result, in Europe, more and more leveraged buyouts have occurred over the past decade and, more significantly, they have grown in size as arrangers have been able to raise bigger pools of capital to support larger, multi-national transactions. To fuel this growing market, a broader array of banks from multiple regions

now fund these deals, along with European institutional investors and U.S. institutional investors, resulting in the creation of a loan market that crosses the Atlantic. The European market has taken advantage of many of the lessons from the U.S. market, while maintaining its regional diversity. In Europe, the regional diversity allows banks to maintain a significant lending influence and fosters private equitys dominance in the market.

Types of Syndications[edit]
Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.

Underwritten deal[edit]
An underwritten deal is one for which the arrangers guarantee the entire commitment, then syndicate the loan. If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credits fundamentals, improve. If not, the arranger may be forced to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit. Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flex-language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

Best-efforts syndication[edit]
A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not closeor may need significant adjustments to its interest rate or credit rating to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.

Club deal[edit]
A club deal is a smaller loanusually $25100 million, but as high as $150 millionthat is premarketed to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

The Syndications Process[edit]

Leveraged transactions fund a number of purposes. They provide support for general corporate purposes, including capital expenditures, working capital, and expansion. They refinance the existing capital structure or support a full recapitalization including, not infrequently, the payment of a dividend to the equity holders. They provide funding to corporations undergoing restructurings, including bankruptcy, in the form of super senior loans also known as debtor in possession (DIP) loans. Their primary purpose, however, is to fund M&A activity, specifically leveraged buyouts, where the buyer uses the debt markets to acquire the acquisition targets equity. In the U.S., the core of leveraged lending comes from buyouts resulting from corporate activity, while, in Europe, private equity funds drive buyouts. In the U.S., all private equity related activities, including refinancings and recapitalizations, are called sponsored transactions; in Europe, they are referred to as LBOs. A buyout transaction originates well before lenders see the transactions terms. In a buyout, the company is first put up for auction. With sponsored transactions, a company that is for the first time up for sale to private equity sponsors is a primary LBO; a secondary LBO is one that is going from one sponsor to another sponsor, and a tertiary is one that is going for the second time from sponsor to sponsor. A public-to-private transaction (P2P) occurs when a company is going from the public domain to a private equity sponsor. As prospective acquirers are evaluating target companies, they are also lining up debt financing. A staple financing package may be on offer as part of the sale process. By the time the auction winner is announced, that acquirer usually has funds linked up via a financing package funded by its designated arranger, or, in Europe, mandated lead arranger (MLA). Before awarding a mandate, an issuer might solicit bids from arrangers. The banks will outline their syndication strategy and qualifications, as well as their view on the way the loan will price in market. Once the mandate is awarded, the syndication process starts. In Europe, where mezzanine capital funding is a market standard, issuers may choose to pursue a dual track approach to syndication whereby the MLAs handle the senior debt and a specialist mezzanine fund oversees placement of the subordinated mezzanine position. The arranger will prepare an information memo (IM) describing the terms of the transactions. The IM typically will include an executive summary, investment considerations, a list of terms and conditions, an industry overview, and a financial model. Because loans are unregistered securities, this will be a confidential offering made only to qualified banks and accredited investors. If the issuer is speculative grade and seeking capital from nonbank investors, the arranger will often prepare a public version of the IM. This version will be stripped of all confidential material such as management financial projections so that it can be viewed by accounts that operate on the public side of the wall or that want to preserve their ability to buy bonds or stock or other public securities of the particular issuer (see the Public Versus Private section below). Naturally, investors that view materially nonpublic information of a company are disqualified from buying the companys public securities for some period of time. As the IM (or bank book, in traditional market lingo) is being prepared, the syndicate

desk will solicit informal feedback from potential investors on what their appetite for the deal will be and at what price they are willing to invest. Once this intelligence has been gathered, the agent will formally market the deal to potential investors. The executive summary will include a description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials. Investment considerations will be, basically, managements sales pitch for the deal. The list of terms and conditions will be a preliminary term sheet describing the pricing, structure, collateral, covenants, and other terms of the credit (covenants are usually negotiated in detail after the arranger receives investor feedback). The industry overview will be a description of the companys industry and competitive position relative to i ts industry peers. The financial model will be a detailed model of the issuers historical, pro forma, and projected financials including managements high, low, and base case for the issuer. Most new acquisition-related loans are kicked off at a bank meeting at which potential lenders hear management and the sponsor group (if there is one) describe what the terms of the loan are and what transaction it backs. Management will provide its vision for the transaction and, most importantly, tell why and how the lenders will be repaid on or ahead of schedule. In addition, investors will be briefed regarding the multiple exit strategies, including second ways out via asset sales. (If it is a small deal or a refinancing instead of a formal meeting, there may be a series of calls or one-on-one meetings with potential investors.) In Europe, the syndication process has multiple steps reflecting the complexities of selling down through regional banks and investors. The roles of each of the players in each of the phases are based on their relationships in the market and access to paper. On the arrangers side, the players are determined by how well they can access capital in the market and bring in lenders. On the lenders side, it is about getting access to as many deals as possible. There are three primary phases of syndication in Europe. During the underwriting phase, the sponsor or corporate borrowers designate the MLA (or the group of MLAs) and the deal is initially underwritten. During the sub-underwriting phases, other arrangers are brought into the deal. In general syndication, the transaction is opened up to the institutional investor market, along with other banks that are interested in participating. In the U.S. and in Europe, once the loan is closed, the final terms are then documented in detailed credit and security agreements. Subsequently, liens are perfected and collateral is attached. Loans, by their nature, are flexible documents that can be revised and amended from time to time after they have closed. These amendments require different levels of approval. Amendments can range from something

as simple as a covenant waiver to something as complex as a change in the collateral package or allowing the issuer to stretch out its payments or make an acquisition.

Loan Market Participants[edit]

There are three primary-investor constituencies: banks, finance companies, and institutional investors; in Europe, only the banks and institutional investors are active. In Europe, the banking segment is almost exclusively made up of commercial banks, while in the U.S. it is much more diverse and can involve a commercial bank, a savings and loan institution, or a securities firm that usually provides investment-grade loans. These are typically large revolving credits that back commercial paper or are used for general corporate purposes or, in some cases, acquisitions. For leveraged loans, U.S. banks typically provide unfunded revolving credits, letters of credit (L/C's), and although they are becoming increasingly less commonamortizing term loans, under a syndicated loan agreement. European banks fund and hold all tranches within the credit structure. Finance companies have consistently represented less than 10% of the leveraged loan market, and tend to play in smaller deals$25200 million. These investors often seek asset-based loans that carry wide spreads and that often feature time-intensive collateral monitoring. Institutional investors in the loan market are principally structured vehicles known as collateralized loan obligations (CLO) and loan participation mutual funds (known as prime funds because they were originally pitched to investors as a money-market-like fund that would approximate the prime rate) also play a large role. Although U.S. prime funds do make allocations to the European loan market, there is no European version of prime funds because European regulatory bodies, such as the Financial Services Authority (FSA) in the U.K., have not approved loans for retail investors. In addition, hedge funds, high-yield bond funds, pension funds, insurance companies, and other proprietary investors do participate opportunistically in loans. Typically, however, they invest principally in wide-margin loans (referred to by some players as high-octane loans), with spreads of 500 basis points or higher over the base rate. CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. The special-purpose vehicle is financed with several tranches of debt (typically a AAA rated tranche, a AA tranche, a BBB tranche, and a mezzanine tranche) that have rights to the collateral and payment stream in descending order. In addition, there is an equity tranche, but the equity tranche is usually not rated. CLOs are created as arbitrage vehicles that generate equity returns through leverage, by issuing debt 10 to 11 times their equity contribution. There are also market-value CLOs that are less leveragedtypically three to five timesand allow managers more flexibility than more tightly structured arbitrage deals. CLOs are usually rated by two of

the three major ratings agencies and impose a series of covenant tests on collateral managers, including minimum rating, industry diversification, and maximum default basket. In U.S., CLOs had become the dominant form of institutional investment in the leveraged loan market by 2007, taking a commanding 60% of primary activity by institutional investors. But when the structured finance market cratered in late 2007, CLO issuance tumbled and by mid-2008, the CLO share had fallen to 40%. In Europe, over the past few years, other vehicles such as credit funds have begun to appear on the market. Credit funds are open-ended pools of debt investments. Unlike CLOs, however, they are not subject to ratings oversight or restrictions regarding industry or ratings diversification. They are generally lightly levered (two or three times), allow managers significant freedom in picking and choosing investments, and are subject to being marked to market. In addition, in Europe, mezzanine funds play a significant role in the loan market. Mezzanine funds are also investment pools, which traditionally focused on the mezzanine market only. However, when second lien entered the market, it eroded the mezzanine market; consequently, mezzanine funds expanded their investment universe and began to commit to second lien as well as payment-in-kind (PIK) portions of transaction. As with credit funds, these pools are not subject to ratings oversight or diversification requirements, and allow managers significant freedom in picking and choosing investments. Mezzanine funds are, however, riskier than credit funds in that they carry both debt and equity characteristics. Retail investors can access the loan market through prime funds. Prime funds were first introduced in the late 1980s. Most of the original prime funds were continuously offered funds with quarterly tender periods. Managers then rolled true closed-end, exchange-traded funds in the early 1990s. It was not until the early 2000s that fund complexes introduced open-ended funds that were redeemable each day. While quarterly redemption funds and closed-end funds remained the standard because the secondary loan market does not offer the rich liquidity that is supportive of open-end funds, the open-end funds had sufficiently raised their profile that by mid-2008 they accounted for 15-20% of the loan assets held by mutual funds. As the ranks of institutional investors have grown over the years, the loan markets have changed to support their growth. Institutional term loans have become commonplace in a credit structure. Secondary trading is a routine activity and mark-to-market pricing as well as leveraged loan indexes have become portfolio management standards.[4]

Credit Facilities[edit]
Syndicated loans facilities (Credit Facilities) are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the requirement. There are four main types of syndicated loan facilities: a revolving credit; a term loan; an L/C; and an acquisition or equipment line (a delayed-draw term loan).[5]

A revolving credit line allows borrowers to draw down, repay and reborrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowing (the facility fee). In the U.S., many revolvers to speculative-grade issuers are asset-based and thus tied to borrowing-base lending formulas that limit borrowers to a certain percentage of collateral, most often receivables and inventory. In Europe, revolvers are primarily designated to fund working capital or capital expenditures (capex). A term loan is simply an installment loan, such as a loan one would use to buy a car. The borrower may draw on the loan during a short commitment period and repay it based on either a scheduled series of repayments or a one-time lump-sum payment at maturity (bullet payment). There are two principal types of term loans: an amortizing term loan and an institutional term loan. An amortizing term loan (A-term loan or TLA) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication. In the U.S., A-term loans have become increasingly rare over the years as issuers bypassed the bank market and tapped institutional investors for all or most of their funded loans. An institutional term loan (B-term, C-term or D-term loan) is a term-loan facility with a portion carved out for nonbank, institutional investors. These loans became more common as the institutional loan investor base grew in the U.S. and Europe. These loans are priced higher than amortizing term loans because they have longer maturities and bullet repayment schedules. This institutional category also includes second-lien loans and covenant-lite loans.

Regulatory compliance[edit]
The Shared National Credit Program was established in 1977 by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to provide an efficient and consistent review and classification of any large syndicated loan. Today, the program covers any loan or loan commitment of at least $20 million that is shared by three or more supervised institutions. The agencies' review is conducted annually, usually in May and June. Federal Reserve Shared National Credit page See Shared National Credit Program Shared_National_Credit_Program

See also[edit]

Fair lending laws Fair trading laws

References[edit]

1.

^ Taylor, Alison; Sansone, Alicia (2007). The Handbook of Loan Syndications & Trading. New York: McGraw-Hill. p. 23. ISBN 0-07146898-6.

2.

^ Taylor, Alison; Sansone, Alicia (2007). The Handbook of Loan Syndications & Trading. New York: McGraw-Hill. p. 36. ISBN 0-07146898-6.

3.

^ Caouette, John B.; Altman, Edward I. (1998). Managing Credit Risk. New York: Wiley. p. 19. ISBN 0-471-11189-9.

4.

^ Taylor, Alison; Sansone, Alicia (2007). The Handbook of Loan Syndications & Trading. New York: McGraw-Hill. p. 68. ISBN 0-07146898-6.

5.

^ Fabozzi, Frank (1999). High-Yield Bonds. New York: McGraw-Hill. p. 43. ISBN 0-07-006786-4.

6. Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, Chapter 6 Loan Syndication Agreements, ISBN 978-1-55520-134-0.

External links[edit]

Categories: A Guide to the U.S. Syndicated Loan Market A Guide to the European Syndicated Loan Market A Glossary for the European Syndicated Loan Market The Loan Syndications and Trading Association The Loan Market Association

Credit Finance Loans

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