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Basics of Syndicated loan
When a group of lenders collectively extend loan to a single borrower, using a similar terms and conditions, documentation etc administered by common agent, it is called a syndicated loan. The group of lenders is called syndicate. Generally, this loan is provided to corporations and government bodies because the amount to be lent is huge. Syndicated loans are primarily given by the banks, but these days a variety of investors are also involved in this loan lending institution such as mutual fund, insurance companies, pension plans and hedge funds.
Types of loan facilities provided by banks
1) Term Loan– It is a loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one to 10 years. Repayment in this system could be at once at the end of the facility or in installments. Once a term loan is paid back by the borrower, it cannot be re-drawn.
2) Revolving Loan– In this facility the borrower decides how often they want to withdraw and in what time intervals. Unlike a term loan, this facility allows borrower to re-draw, re-pay or drawdown the loan during the term of its facility. If a revolving loan made to re-finance another revolving loan and drawn by the same borrower in the same currency which matures on the same date as the drawing of the second revolving loan, is known as a “rollover loan”.
3) Evergreen facility– A loan that can be extended after-pre set periods. Like a five year loan facility can be renewed and increased by further 5 years.
4) Back stop facility– This loan is designed to be drawn only as the last resort for e.g. in situations like when a corporation is on verge of liquidation. It works as a back-up when other funding sources have failed. There is also a swing line facility, which gives the borrowers the “same day money.”
5) General facility– Syndicated loan agreements could either be a term facility or may be revolving facility or they can contain combination of both or several of each type.
Parties to a syndicated loan
Borrower– The person or institution which is in need of a loan and initiates the process is the borrower.
Arranger– Generally one of the lenders (mostly a bank) who forms a syndicate. He communicates, negotiate and lure financial institutions to join the syndicate. Also suggests the borrower which facility it requires and help it in negotiating the terms of the facility.
Co-arranger– The first or initial group of lenders are called co-arrangers. They find more institutes to join the syndicate.
Agent– He is the one who looks after the day–to- day working and administration of the loan facility. He acts as an agent of the lenders not borrowers. He acts as a mediator between syndicate and borrower. His duties are to set the loan agreement and for which it gets paid by the borrower. Agent has to ensure that the borrower has complied with every condition mentioned in the loan agreement and borrower is required to give all notices to the agent. The borrower and syndicate are required to make all payments (under the loan agreement) to the Agent. He then transfers that money back to the opposite parties.
Security Trustee- To secure the syndicate loan, a lender from the syndicate is usually appointed as a Security Trustee to look after the security on trust for the benefit of the lenders. Its duties are far more extensive than that of an agent.
Co- lenders- The co-lenders would normally constitute a group of banks or other financial institutions who have contributed a percentage share towards the syndicated loan. Once these institutions have given their share of loan, and the syndicated loan agreement is signed; they usually take a more passive role in the project, relying on the competence of the Agent to further their interests.
Decision making panel-Usually the duty of making decisions in granted to a group of lenders in a syndicate to minimize the effort of consulting each and every lender. This group could be made of the lenders who hold maximum commitment i.e. who has given biggest loan in the syndicate.
Process of Syndication
Once the need of credit has been realized by the borrower then it should contact with the bank or money lending institution which could itself lend some money and work as an arranger to form a syndicate for the borrower. To appoint an arranger the borrower sends a Mandate letter (also called as a commitment) letter to the arranger.
The content of a Mandate letter is-
1) An agreement to underwrite or use best efforts to arrange.
2) Titles of arrangers, commitment amounts, exclusivity provisions.
3) Duties of the lenders and conditions to their obligations.
4) Syndication issues (including preparation of an information memorandum, presentations to potential lenders, clear market provisions, market flex provisions and syndication strategy)
5) Costs cover and indemnity clauses.
Term Sheet– Before documentation, the terms related to financing or credit are included in term sheet. It is usually attached and signed with the Mandate Letter. Parties involved, their duties, roles and many important terms are included in it.
Project details and estimated Capital requirements– The arrangers have responsibility of making a syndicate and help borrower get the credit. They should be aware of the details of the project. Like-background of the promoters in detail, promoters contribution to the project, details about the project report and progress of the project.
Information Memorandum- Generally prepared by both, the arranger and the borrower and is sent to the potential syndicate members. The arranger assists borrower in drafting this memorandum. They mention the important description about the borrower business (mentioned above) and details of proposed facilities. It is a confidential document and all potential lenders that wish to see it usually sign a confidentiality agreement.
The choice of sources of fund depends upon–
i) Nature of the project.
ii) Estimation of the cost of the project.
There are three types of sources of money–
Short term finance– When the funds are needed for 1 year. It can be made available by commercial banks, trade credit, public deposits etc.
Medium term finance– When funds are needed for 1-5 years. These funds are for buying new assets, working capital or expansion of the business. These are granted by commercial banks and all India Financial Institutions.
Long term finance- When funds are required for more than 5 years.
Preparation of Loan application- Arranger should make sure that the client company has complied with all the necessary formalities. If there are more than one creditors, the application will be filed with one development finance institution and the company or the arranger will deal with only one institution termed as ‘lead institution’ . The project will be appraised and sanctioned under ‘single window’ concept method of dispensing of credit.
Syndicated Loan Agreement: The loan agreement in which the detailed terms and conditions of the facility is made available to the borrower. The agents have to follow up the sanction of the loan amount by the lender. The Appraising Institute (who appraises the project) takes the matter to its board of directors or its office may put the proposal with full appraisal note before the sanctioning authority for according necessary sanction. Then the financial institution informs the applicant borrower of such sanction along with the detailed terms and conditional and arrangements of other lenders. The sanction letter mainly covers amount of loan, interest, commitment, charge security for the loan conversion option, repayment of loan etc.
Different kinds of Fees for loans
1) Arrangement fee- Fee paid to the bank for arranging syndication, which includes structuring, syndicating and negotiating the documentation.
2) Underwriting fee- Underwriting fees is money collected by underwriters for performing underwriting services.
3) Participation fee- Fee paid to the bank for joining the Syndicate process and is paid according to the commitment of the loan given by the bank.
1) Commitment fee- it is charged on undrawn element of either a term loan or revolving loan to compensate bank for the contingent liability. It usually half of the margin. Sometimes, it is also according to the level of utilization of the loan.
2) Facility fee – It is charged on commercial paper standby or back-stop facilities. It is not like commitment fee and is payable in full amount regardless of the utilization.
3) Management fee- Fee paid to the lead manager or arranger.
4) Agent fee- The fee paid to the agent for its services. 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.