Loan syndication is almost similar to consortium finance. Loan syndication is an arrangement between one or more lending institutions to provide a borrower a credit facility using common loan documentation. The syndication process is initiated by a borrower who appoints a leader through granting him mandate to act as the Arranger of Mandated lead Arranger on the deal. The arranger is responsible in advising the borrower as to the type of facilities it requires; and then negotiating broad terms of those facilities.
This term is generally used in international trade in which following type of banks are involved:
1. Managing bank- Appointed by borrower to arrange credit-borrower pay fee as percentage of loan
2. Lead bank- Bank which provides major portion of loan.
3. Agent bank- Bank appointed by borrower to look after his interest after loan agreement is signed. This bank takes over from managing bank.
4. Participating banks- Banks actually providing loans-
(i) Wholesale large banks providing major loans
(ii) Retail sector banks providing small loans
Documents in loan syndication.
1. Information Memorandum- Prepared by arranger i.e. managing bank and borrower about borrower business details and proposed loan.
2. Mandate better- Given by borrower to managing bank for arranging credit.
3. Term Sheet- Indicating details of terms of loan prior to documentation.
4. Loan agreement- To be signed by borrower and lending banks.
5. Fee letters- About fee payable by borrower to banks.
Features of Syndicated Loan and its Composition
♦The borrower finalizes the amount and the currency of the loan required and invites offers from the banks to arrange for finance.
♦ Banks who give their quotes for interest rates, fees, etc and undertakes the responsibility of arranging syndication is normally called the lead Bank/Manager/Arranger.
♦ Borrower will examine the offers of the various banks and will choose the best available offer, which is best suited to its needs. After deciding or selecting the bank, the borrower gives authority to that bank which acts as the leader to arrange the loan.
♦ Then the borrower and the arranger bank will formulate a memorandum of information, giving financial and other details of the co-lender. This is the important document on the basis of which the Arranger will seek participation of other interested banks/ lenders.
♦ While seeking/inviting banks to participate in the syndication, the Arranger will have to give details of sharing of fees, securities, etc. and it is expected to share in the proportion of the share to be picked by members in the consortium. In case of any shortfall in the participation of lenders, then the such portion of loan is expected to be taken up by the leader of the syndicate.
♦Once the entire tie-up is done and finalized, the borrower and lender finalize the loan agreement and the borrower executes the same.
Differences between syndicated loan and joint loan
|Item||Syndicated Loan||Joint Loan|
|Inter-bank Relationship||All members join together to contact with borrowers through lead and agency banks.||All banks, independent from each other, contact with borrowers separately|
|Approval of Loans||All banks make loan decision on the basis of the information memorandum provided by the lead bank||All banks collect information separately and go through many rounds of examination.|
|Loan Contract||Unified contract||Each bank signs contract with the borrower by itself.|
|Loan Terms (interest rate, term, guarantee type)||Unified conditions||Each bank negotiates with the borrower separately with different terms of loans.|
|Loan Dispersement||Funds are collectively transferred in agreed proportions via the agency bank.||Loans are dispersed separately with derivative deposits retained at each bank.|
|Loans Management||In the charge of the agency bank||Management of its own share of loans by each bank|
|Recovery of Loan Principal and Interest||The agency bank is responsible for the collection of principal and interest according to the contract and transfer of relevant amounts to designated account of each bank in lending proportions||Each bank collects principal and interest according to repayment of principal with interest plan separately agreed with its borrowers|