'Syndicated Loan' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Syndicated Loan refers to a special type of loan which a group of lenders provides to a borrower. It is also called a syndicated bank facility. The lending group that works in concert is known as a syndicate. Their mission is to pool their resources in order to offer funds to single individual borrowers. The borrower does not have to be a corporation in every single scenario. It could similarly be a large project, corporation, or even sovereign government. Such loans might be made up of credit lines, fixed dollar amounts in funding, or some happy combination of the two concepts.
The reason that Syndicated Loans become necessary is because sometimes projects grow too big for only one lender to underwrite them or because a particular project requires a specialized type of lender which boasts significant expertise and experience in handling a particular asset class. This permits them to spread around the considerable risk of the larger project and enables other financiers to have a part in such interesting and potentially lucrative financial opportunities which may be simply too big for the capital bases of the individual participants. The interest rates associated with this kind of loan will either be floating or fixed. This will hinge on a specific benchmark interest rate like the LIBOR London Interbank Offered Rate.
Various important components exist with a Syndicated Loan. The underwriter or lead bank is the agent, arranger, or leading lender. Such a lead lender will often put up a more significant percentage of the funding. It may also choose to handle such responsibilities as administrating the syndicate and dispersing the cash flows to the other members of the syndicate.
The primary ultimate goal in such syndicated lending lies in spreading around the default risk of the borrower over a range of lenders, including institutional investors, banks, hedge funds, and pension funds. As these Syndicated Loans are often far larger than a typical bank loan, the risks of only a single borrow defaulting could ruin only one lender. Such types of loans are also commonly employed with the leveraged buyout set in order to pay for a major corporate acquisition using both debts financing and funding.
Such Syndicated Loans will often be offered on what is called a best-effort basis. This means that when sufficient numbers of investors are not able to be brought on board, then the borrower’s final amount will be less than originally forecast. Such loans might also be split into dual tranches. One group like the banks would be standard revolving funders while the institutional investors would be used to funding fixed rates varieties of term loans.
It is important to remember that Syndicated Loans are often way too big for only one lender to take on alone. It is always helpful to consider a real world example with a complex concept such as this one. Consider Tencent Holdings Limited. This just happens to be Asia’s largest Internet company. They own WeChat and QQ instant messaging systems. They sought out a syndicated loan in the amount of $4.4 billion back on June 6th of 2016. Such a loan was anticipated to help fund additional company acquisitions. It was considered to be a fantastic investment for those investors who were looking out for a credit safe haven in the midst of rising default risks across China.
This loan was underwritten by five different major global financial institutions. These were HSBC Holdings PLC (Britain and Europe’s largest bank), Citigroup Inc., Bank of China, Australia & New Zealand Banking Group, and Mizuho Financial Group Inc. The five mega banks combined their powers in order to fund a syndicated loan which was a five year term facility that they split between a revolver and a term loan.