Introduction

The main goal of syndicated lending is to spread the risk of a borrower default across multiple
lenders (such as banks) or institutional investors like pensions funds and hedge funds. Because
syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower
defaulting could cripple a single lender. Syndicated loans are also used in the leveraged buyout
community to fund large corporate takeovers with primarily debt funding.
Syndicated loans can be made on a "best efforts" basis, which means that if enough investors
can't be found, the amount the borrower receives will be lower than originally anticipated. These
loans can also be split into dual tranches for banks (who fund standard revolvers or lines of
credit) and institutional investors (who fund fixed-rate term loans).
Loan Syndication
As per Encyclopedia of Banking and Finance (EBF), Syndication means a temporary
association of parties for financing and execution of some specific business purpose. EBF also
defines Syndicated Loan also an extended by multiple banks where the overall credit involved
exceeds an individual lenders legal lending or other limits. Syndicated loan is made available by
a group of FIs in pre-defined proportions under the same credit facility following common loan
documentation formalities. Loan syndication is different from club financing (where many banks
finance a single borrow) in terms of deal origination, mechanism, documentation, disbursement,
monitoring, management etc.
The process of involving several different lenders in providing various portions of a loan. Loan
syndication most often occurs in situations where a borrower requires a large sum of capital that
may either be too much for a single lender to provide, or may be outside the scope of a lender's
risk exposure levels. Thus, multiple lenders will work together to provide the borrower with the
capital needed, at an appropriate rate agreed upon by all the lenders. Mainly used in extremely
large loan situations, syndication allows any one lender to provide a large loan while maintaining
a more prudent and manageable credit exposure, because the lender isn't the only creditor. Loan
syndication is common in mergers, acquisitions and buyouts, where borrowers often need very
large sums of capital to complete a transaction, often more than a single lender is able or willing
to provide.
A loan offered by a group of lenders (called a syndicate) who work together to provide funds for
a single borrower. The borrower could be a corporation, a large project, or sovereignty (such as a
government). The loan may involve fixed amounts, a credit line, or a combination of the two.
Interest rates can be fixed for the term of the loan or floating based on a benchmark rate such as
the London Interbank Offered Rate (LIBOR). Typically there is a lead bank or underwriter of the
loan, known as the "arranger", "agent", or "lead lender". This lender may be putting up a
proportionally bigger share of the loan, or perform duties like dispersing cash flows amongst the
other syndicate members and administrative tasks.
A loan offered by a group of lenders (called a syndicate) who work together to provide funds for
a single borrower. The borrower could be a corporation, a large project, or sovereignty (such as a
government). The loan may involve fixed amounts, a credit line, or a combination of the two.
Interest rates can be fixed for the term of the loan or floating based on a benchmark rate such as
the London Interbank Offered Rate (LIBOR). Typically there is a lead bank or underwriter of the
loan, known as the "arranger", "agent", or "lead lender". This lender may be putting up a

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proportionally bigger share of the loan, or perform duties like dispersing cash flows amongst the
other syndicate members and administrative tasks.
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 or investment banks known as lead arrangers.
The syndicated loan market is the dominant way for corporations in the U.S. and Europe to
top 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.
Characteristics of Loan Syndication
Essentials characteristics of it are as follows
a) Single borrower
b) More than one lender
c) Common loan and security documentation
The Reasons for Why Loan Syndication is Required
Loan syndications can be a useful tool for banks to maintain a balanced portfolio of loan assets
among a variety of industries. If one loan is too large, it may overweight the bank's portfolio.
Therefore, banks may pursue a syndication to accommodate a loan and keep its portfolio in
balance. At the same time, loan syndications may incur a large expense to the borrower. While
the syndication fee is usually financed, the burden of repaying the loan and syndication fee is
shouldered ultimately by the borrower. The reasons are as follows

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a) Banks are restricted to take funded exposure on a single borrower up to 15% of their capital
and non-funded exposure up to 20% of their capital.
b) Banks also set prudential loan limit internally to restrict loan exposure on a single customer.
c) Bangladesh Bank further limits percentage of total credit portfolio that can be inform of large
loan (i.e. loan size exceeding 10% of Banks capital) based on percentage of classified loan.
For example, large loan can be maximum 56% of portfolio for NPL below 5%, maximum
52% for NPL exceeding 5% but less than 10%, etc.
d) Infrastructure projects and capital intensive industrial undertakings require lumpy investment
that isnt possible for a single bank to address

Types of Syndications
Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts
syndication, and a club deal.
a) Underwritten deal
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.
b) Best-efforts syndication
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
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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 investmentgrade transactions.
c) Club deal
A club deal is a smaller loanusually $25100 million, but as high as $150 millionthat is
premarket 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.

Advantages of Loan Syndication

Some advantages of loan syndication are as follows
a) Diversification/ sharing of risks cost sharing and pooling of resources and reputation.
b) Participating banks play useful roles by providing informative opinions and/ or additional
expertise even after the funding has been extended.
c) Popular scheme for financing large and medium scale projects.
d) The ability of the customer to deal with single Bank/ FI (Lead Bank and Agent Bank )
as a one-stop service point.
e) Syndication provides borrower with a complete menu of financing options, which usually
results in more competitive loan pricing, product innovations and wider cooperation.
f) The opportunity for the borrower to establish a track record with many banks from just a
single transaction.
Parties to Loan Syndication
a) Borrower: An institution or individual that raises funds in return for contracting into an
obligation to repay those funds, together with payment of interest over the loan. Borrowers
elect/ mandate a bank to work as the Lead Arranger for the deal.
b) Lead Arranger: Responsible for raising/ arranging the fund. Lead Arranger or Bank coordinates all activities related to a particular syndication deal from proposal origination to
final disbursement of the loan. It also performs following functions: Assists the borrower to
structure the project and set important loan parameters, prepare the information
memorandum, formulate a plan to raise the fund within an agreed time schedule
Has the responsibility for much of the loan selling.
Acts as the first port of call for questions and answer them authoritatively in order to
head off problems and sensitivities before they arise.
c) Agent: Performs following functions:
Preserve all security documents and provide administrative & monitoring
activities during tenure of the loan.
Act as the agent for the banks (not for the borrower) and to co-ordinate and
administer all aspects of the credit facility once relevant documentation has been
executed.
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The activities include disbursement of money, collection of money, e.g.

commitment fees, front-end fees, interest and repayments of principal.
Responsible for transmitting any post-closing waivers or amendments requested
by the borrower and negotiating them with the syndicate banks.
Inform the participating banks regarding progress of the project.
Circulate audited financial statements regularly.
Call for a review meeting time to time where the borrowers and the
representatives of the participating banks will be present.

d) Participating Banks/ Financial Institutions (Fls): A group of Banks/ FIs committing to

some extent for participation in the syndication deal.
e) Joint Arranger/ Co- Arranger: One or more mandated banks who will act jointly to raise
the fund from the syndicated market.
f) Numerous other participants may remain present such as Security Trustee, Book Runner,
Model Bank, etc.
Loan Market Overview
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
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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.

The Loan Syndications Process

When a project is unusually large or complex, it may exceed the capacity of a single lender. For
example, the amount of the loan may be too large, the risks too high, the collateral may be in
different locations, or the uses of capital may require special expertise to understand and manage
it. In these cases, a financial institution may bring other lenders into the deal.
a) Pre-Signing Stage: Includes time period covering following two phases:
Pre-mandate stage. During this phase, the details of the proposed transaction are
discussed and finalized through an indicative Term Sheet. After finalization of Term
Sheet, a Letter of Mandates obtained from the borrower. This time period is rarely
shorter than one month and can be as long as one year.

Post-mandate stage. During this phase, loan syndication takes place and facility
agreements are negotiated and finalized. It is concluded by a closing or signing
ceremony. This phase may take six to eight weeks.

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b) Post-Signing Stage: Period covering after execution/ signing of syndication loan and
security documents till full and final adjustment of syndicated loan facility.
Usually, the loan syndication limits the liability of each lender to its share of the loan interest. In
this way, each lender limits its loan amount to a manageable size, and limits its risk exposure.
Additionally, each lender may have a collateral interest in a unique or specialized asset from the
borrower, such as a piece of equipment.
Loan syndications involve a large amount of coordination and negotiation. Typically, loan
syndications involve a lead financial institution, or syndicate agent, which organizes and
administers the transaction, including repayments, fees, reporting and compliance, and loan
monitoring. Often, such transactions require the services of a specialist who syndicates the loan
on behalf of the borrower; identifying lenders while negotiating terms and conditions, and even
representing the borrower throughout disbursements. Loan syndication fees can be expensive,
ranging from 5% to 10% of the loan principal. 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 refinancing 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).
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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.

Loan Market Participants

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 commercial and investments banks, business
development corporations or finance companies, and institutional investors such as asset
managers, insurance companies and loan mutual funds and loan ETFs. As in Europe, commercial
banks in the U.S. provide the vast majority of 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, considered non-investment grade risk, U.S. and
European banks typically provide the revolving credits, letters of credit (L/C's), andalthough
they are becoming increasingly less commonfully amortizing term loans known as "Term
Loan A" under a syndicated loan agreement while institutions provide the partially amortizing
term loans known a "Term Loan B".
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
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tranche, a AA tranche, a BBB tranche, and a mezzanine tranche with a non-investment grade
rating) 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., before the financial crisis in 2007-2008, CLOs had become the dominant form of
institutional investment in the leveraged loan market taking a commanding 60% of primary
activity by institutional investors by 2007. 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 2014
CLO issuance has demonstrated a full recovery with issuance of $90 billion by August, an
amount that effectively equals the previous record set in 2007. Projections on total issuance for
2014 are as high as $125 billion.
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 openended 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
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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.

Credit Facilities
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).
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
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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.
Loan Syndication Fees & Charges
a) Loan Processing Fee (Flat): A lump-sum on-refundable amount to be paid to the Lead
Arranger for processing the loan.
b) Arrangers Fee: Fee to be paid for arranging the fund based on syndicated amount before
signing of the agreement to the mandated bank/ Lead Arranger or group of banks for
arranging a transaction (This fee will not be shared to the participating banks).
c) Agency Fee (Flat): Fee payable to the Agent Bank for preserving all security documents and
for rendering administrative & monitoring activities as Agent over tenure of the loan.
d) Participation Fee: Fee to be paid on syndicated loan amount to the participating banks based
on participation amount.
e) Management Fee (Annual): Fee on outstanding loan amount at each year end during loan
period to be shared by all participating banks.
f) Commitment Fee (Quarterly): Fee payable on undrawn portion of loan limit.
g) L/C Commission: L/C opened by the Front Bank (Lead Arranger or L/C opening Bank) and
a commission to be realized, of which L/C opening Bank may retain a percentage as skim
and the rest is shared on pro-rata basis.
Conclusion
Mainly used in extremely large loan situations, syndication allows any one lender to provide a
large loan while maintaining a more prudent and manageable credit exposure, because the lender
isn't the only creditor. Loan syndication is common in mergers, acquisitions and buyouts, where
borrowers often need very large sums of capital to complete a transaction, often more than a
single lender is able or willing to provide. Loan syndication most often occurs in situations
where a borrower requires a large sum of capital that may either be too much for a single lender
to provide, or may be outside the scope of a lender's risk exposure levels. Thus, multiple lenders
will work together to provide the borrower with the capital needed, at an appropriate rate agreed
upon by all the lenders.

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