Syndicated loans are increasingly becoming a prominent feature in the loan market landscape due to their numerous advantages to both banks and corporates.
In simple terms, a syndicated loan happens when a group of two or more banks jointly provide loan facilities to one borrower, usually a corporate entity in need of large-scale financing which any one bank may not be in a position to offer for a number of reasons, including inability to provide the required funding in full. In an economy experiencing liquidity problems which leave companies in dire need of funding and banks struggling to satisfy or maintain capitalization requirements, syndicated loans only make more sense as they would sustain the loan markets and commercial activity.
Benefits of loan syndication to banks
1.Loan syndications allow banks that are constrained by their capital-asset ratios to participate in loans to larger banks.
2. Banks can achieve diversified loan portfolios.
3. Syndicated loans enable banks to expand lending to broader geographic areas and industries.
4. Banks can enjoy institutionalized sharing of risk on the jointly offered loan facility, thereby minimizing their exposure in the event of default.
5. More efficient administration of the loan in that the syndicate of banks will appoint only one of them to be responsible for the administrative issues related to the loan such as processing draw downs and pursuing loan collections.
6. Establishment of relationship with larger banks in other jurisdictions who may be in a position to extend funding to smaller banks.
Banks participating in a syndicated loan should always scrutinize information about the borrower which will be supplied to them by the Lead Arranger (the bank that is engaged by the borrower to seek funding and structure the syndicated loan in exchange for an arrangement fee) lest they be misled by the Mandated Lead Arranger whose objective would be to secure the participation of banks in the syndicated loan.
Some level of due diligence or ‘know-your-client’ process should therefore be a prerequisite to any participation in a syndicated loan.
Benefits of syndicated loans to corporates
7. Syndicated loans enable businesses to raise large-scale financing.
8. Less time and effort is expended in seeking funding as this role is taken up by the Mandated Lead Arranger.
9. Securing financing from various lenders at uniform interest rates and uniform loan terms.
10. Efficient funds management as there will be no need to make various payments to each of the participating banks.
11. Developing new relationships with various financial institutions.
Corporates considering seeking syndicated loans would do well to seek legal advice to protect their interests from the outset whether they are first time or repeat syndicated loan borrowers. Even though the Mandated Lead Arranger is supposed to act in the interests of the borrower in organizing funding, once the funding is secured, the Mandated Lead Arranger starts acting in its own interests and may even be a participating lender and therefore on the side of the lenders. The borrower would then require legal guidance in the negotiation of loan terms and reviewing loan documents prior to execution of the loan.
For legal advice contact our Banking & Finance Team.