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Loan Syndication Definition
Loan syndication occurs when a borrower requests an amount of loan too large, the risks too high, the uses of capital may require expertise, skills, among others. In this scenario, a group of lenders comes together to form a syndicate so as to provide the required amount. In other words, it is a lending process in which a group of lenders provides funds to a single borrower.
In order to reduce corporate detrimental costs, limit disputes, implement contract rules and regulations and also enforce obligations, a corporate risk manager and legal counsel are needed. The corporate risk manager and the legal counsel come up with a binding agreement between the group of lenders and the borrower. This agreement features obligations, stipulated time of returns, loan terms, and conditions, among others.
A Little More on What is Loan Syndication In Corporate Finance
The importance of loan syndication cannot be overemphasized in corporate financing. Loan syndication is useful in corporate financing as this enables companies to be able to fund capital expenditure projects such as mergers, company acquisitions, buyouts, expansion, production capacities, machinery, and others. Funds for these huge projects can not be handled by a lender, hence, there is a need for a syndicate of lenders. This loan syndication allows for huge capital generation for demanding projects.
In a syndicate of lenders, the risks are shared according to their respective loan interest. It is also important to note that the terms of giving the loan except collateral, are the same. Collateral assignments are mostly assigned to varying assets of the borrower for each lender; each lender assigns collateral worth amount offered. As far as loan syndication is concerned, there is only one binding loan agreement. All lenders are subjected to the binding agreement.
It is the responsibility of the corporate risk manager(s) to ensure a cordial but official relationship between the primary lender and the secondary loan providers as this is quite pertinent to the business.
Financial Institution Coordinates Loan Syndication
A financial institution oversees the transactions of the lenders. They are responsible for providing compliance reports, repayment plans, processes, loan monitoring, and checks. Also responsible general reports and financial statement records covering the time frame of the loan syndication. This institution reports back to the group of lenders. They are also referred to as ‘syndicate agent’.
Loan syndication, because of the extensive reporting and monitoring needed, may require the borrower to pay exorbitant processing fees. The fees can be slated at 10% of the loan principal or more. loan syndication may require more than one or two expertise asides the corporate risk manager and the legal counselor, this is done because of the complexity and scrutiny involved.
In recent years, a leading group of lenders in the United states loan market are: Bank of America/Merrill Lynch, JPMorgan, Wells Fargo, and Citi, these institutions have handled loan-funded syndications above billions of dollars. In 2015, Charter Communications Inc. seeks a $13.8 billion of loans for its $55 billion acquisition of Time Warner Cable Inc., with this loan offer responded to by Credit Suisse being the primary lender and others. This loan offer made Charter top the list of loan funded syndications in 2015.
The Loan Syndications and Trading Association (LASTA) is an organization responsible for monitoring and influencing compliance procedures. They conduct market research for market participants and also provide needed knowledge on loan syndications. They are responsible for creating a cordial relationship between the market participants.