'Loan Syndication' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Loan Syndication refers to the procedure of getting a few different lenders involved in delivering a few different components of a loan. This activity typically happens in those situations where borrowers need to borrow a huge amount of capital. In these cases, the money required might be more than any one lender will feel comfortable providing or could be higher than certain lenders’ levels of allowed risk exposure. This is why many lenders choose to work hand in glove on such projects in order to deliver the financing a borrower requires.
Corporate borrowing typically involves this type of loan syndication such firms look for loans to cover a wide range of needs. It is most often needed as companies are attempting to perform an acquisition, a merger, or a share buyback, or for other kinds of capital intensive projects. With a capital project of this nature, significant loans will be involved. This is why these loan syndications are utilized for these types of projects or merger and acquisition activity.
This kind of Loan Syndication permits any single lender to be involved with more than only a single huge loan. It also allows it to keep a more manageable and sensible level of credit exposure since it is not the one creditor involved with the deal in question. In these types of multi bank underwritten deals, the various lenders’ terms will commonly be identical to the borrower, although there are incidents where this is not the case and they instead vary. The various lenders will often require different amounts of collateral. These requirements can vary significantly. It is common however for there to almost always be a single loan agreement which governs the whole of the syndicate group.
With the majority of Loan Syndication, one financial institution plays the role of lead bank. They will then arrange all terms and particulars of the deal itself. This lead financial institution is commonly referred to as the deal’s syndicate agent. Such an agent is commonly responsible to handle all particulars of the deal. This means they will arrange the upfront transaction, compliance reports, fees, loan monitoring, reporting, and repayment arrangements in the life of the loan. They do this on behalf of every lender who is a party to the deal.
There can be specialists brought in to help with some aspects of the deal in question. These are typically third parties which are not a part of the loan syndicate. They often handle such important administrative functions as monitoring and report making. With loan syndications, there are many times higher fees to cover the huge reporting requirements as well as to finalize, package up, and handle the loan servicing and processing. This means that fees can run up to 10 percent of the principal of the loan amount.
For the year 2015, the company with the greatest amount of loan funded syndications on its books was Charter Communications. They boasted of $13.8 billion in syndicate amounts thanks to the merger transaction with Time Warner Cable. The lead financial institution on the syndication was Credit Suisse. For the loan market of the United States, the banks which represent the foremost lead institutions with loan syndications prove to be Bank of America Merrill Lynch, Wells Fargo, JPMorgan, and Citi.
There is an umbrella organization which covers the corporate loan market. This is the LSTA Loan Syndications and Trading Association. There goals are to offer resources for those firms interested in participating in loan syndications as well as those companies that require the services of loans in this capacity. It brings together all of the various important players in the market, delivers market research on relevant topics, and even lobbies industry regulators to impact procedures for compliance in Washington, London, and other important loan syndication cities around the world.