Suppose you need 100 crore Rupees for an investment project. You go to a bank, they tells you that they can not finance more than 10 crore Rupees and so you move to a new lender. Here again you find same difficulty. So now you have an option to take loan from multiple lenders. In this case you have to deal with multiple lenders for single investment project.
Here borrower can use loan syndication facility. He needs to appoint one Arranger or lead manager. This Bank place the syndicated loan to other banks and makes sure that syndication is fully subscribed. A syndicated facility is a lending facility, defined by a single loan agreement, in which several or many banks can participate.
A borrower wants to raise a relatively 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. So what should he do? Even lender doesn’t want to miss this opportunity. They can simply use loan syndication facility.
By this approach borrower gets desired amount without dealing with multiple lenders while lenders do not miss a profitable loan proposal due to low exposure limit and minimize their risk.
The market for syndicated loans is huge. In 2003 banks extended close to USD 2 trillion in syndicated loans. 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
ROLES WITHIN THE SYNDICATION PROCESS
1. ARRANGER / LEAD MANAGER: this is the bank that has been awarded mandate by prospective borrower and he is responsible for placing the syndicated loan to other banks. Arranger has to ensure that issue is fully subscribed.
2. UNDERWRITING BANK: The bank that commits to supplying the funds to the borrwoer -if necessary from its own resources if the loan is not fully subscribed. Underwriter may be the arranging bank or another bank. This should be noted that not all syndicated loans are fully underwritten. Risk is that the loan may not be fully subscribed and underwriter has to supply funds committed.
3. PARTICIPATING BANK: The bank that participates in the syndication by lending a portion of the total amount required.
4. FACILITY MANAGER / AGENT: The one that takes care of the administrative arrangements over the term of the loan (e.g. disbursements, repayments, compliance). He acts for the banks.
BENEFITS TO THE BORROWER
•Deals with a single bank: As stated earlier borrower in case of syndicated loan facility doesn’t need to deal with each and every lender. Borrower has to deal with Lead manager only. This saves time and administrative expense of borrower.
•quicker and simpler than other ways of raising capital: Borrower can alternatively raise capital through other sources. He can issue share, debenture etc. But this entire route involves substantial cost and time. Syndication is a better option in this regard.
BENEFITS TO THE LEAD BANKS
•Good arrangement and other fees can be earned without committing capital: Lead manager earns fees because of his services to borrower. This can be done without committing any capital.
•Enhancement of bank’s relationship with the client: Because Lead banker deals with client his relationship with client enhances that can bring business for bank in long term.
BENEFITS TO THE PARTICIPATING BANKS
•Access to lending opportunities with low marketing costs.
•Opportunities to participate in future syndications.
•in case the borrower runs into difficulties, participant banks have equal treatment.
STAGES
1. PRE-MANDATE PHASE
The prospective borrower may liaise with a single bank or it may invite competitive bids from a number of banks.
THE LEAD BANK NEEDS TO: identify the needs of the borrower and designs an appropriate loan structure. Then develop a persuasive credit proposal to obtain internal approval.
2. PLACING THE LOAN
The lead bank can start to sell the loan in the marketplace. He needs to prepare an information memorandum, term sheet, legal documentation and then approach selected bank and invite participation. Lead manager need to negotiate with borrower at this stage to satisfy participant’s concern if any.
3. POST-CLOSURE PHASE
The agent now handles the day-to-day running of the loan facility.
Benefits of loan syndications 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.
Example of Loan syndication Deals:
In 2005 Reliance Port and Terminal, a subsidiary of Reliance Industries, has raised loan for expanding its port facility (Rs 42 billion) to increase imports of crude oil by Reliance Petrochemicals, from 33 million tones to around 66 million tones. A total of 20 banks syndicated the loan with the security trustee being the UTI Bank.
Similarly, Indian Rayon raised Rs 750 crore to acquire 50 per cent of AT&T's stake in Idea Cellular. The balance of the AT&T stake, valued at Rs 1,500 crore (Rs 15 billion), will be picked up by the Tatas.
The same applied for a loan syndication of Rs 5,000 crore (Rs 50 billion) for Hindalco a few years back and for Rs 1,000 crore (Rs 10 billion) for Bhushan Steel.
SBI Caps has been a leading player in the Indian loan syndication market. It has been ranked first in Asia-Pacific for project finance syndication by Thomson Project Finance International. Realizing the huge potential in the loan syndication market, the investment bank tied with IDFC for syndication of debt financing of infrastructure projects in 2006.
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