Mike Montgomery

Two Ideas for Helping Community Banks

By | Article, Insights

Understanding the Role and Importance of Community Banks

The recent failures of Silicon Valley Bank and Signature Bank focused a bright light on community banks. Community Banks are the heart of the US Banking system, numbering about 4,500 with this number decreasing by about 100 banks each year.

According to the FDIC, these community banks “play a vital role in the functioning of the US financial system and broader economy, from lending to small business owners and farmers, to providing critical banking services in small towns and rural communities across the nation.”

While flattering to the community bank segment, that definition of the role of community banks does not do these critical financial intermediaries justice. As of 12/31/22 community banks (banks other than the 50 largest banks in the US) –

  • Held almost $5 Trillion in deposits
  • Had almost $4 Trillion in loans on their books

loan and deposits 22 Q4

Source: FDIC Call Reports

Additionally community banks:

  • Provide about 60% of all small businesses loans
  • Originate more than 80% of agricultural loans
  • Have nearly 50,000 locations
  • Employ nearly 700,000 people

Source: Independent Community Bankers of America


The Challenge Facing Community Banks

Immediately following the recent bank failures, deposits flowed out of community banks and into large money center banks seeking the apparent safety of “too big to fail” banks.  While this surge has subsequently slowed community banks face significant challenges as interest rates rise, operating costs rise and the lines between mega banks and community banks seem more clearly drawn.

Here are two ideas for strengthening community banks

  • Make deposit insurance available in amounts larger than $250,000 per account. Deposit insurance is the only type of insurance where “one size fits all”. There is no magic in the FDIC’s insurance of $250,000 per account. It is not tied to an inflation-based formula, it has simply been raised by congressional action to deal with then-current conditions.


Since 1934 the amount of maximum deposit insurance has been raised seven times. It was last raised from $100,000 to $250,000 in 2008 to bolster waning depositor confidence in the banking system following The Great Recession.


While $250,000 deposit insurance is sufficient for most consumers, many investors and businesses could be enticed to remain at community banks if additional account insurance was available.


Allow banks to decide how much insurance they need to provide to serve their depositors. Allow these banks to purchase additional deposit insurance.

Some banks may decide that the $250,000 base amount is sufficient for their depositors while other banks may, at their own expense, purchase additional deposit insurance. This also matches deposit insurance expense with the users of the insurance rather than apportioning premiums among all insured institutions as is now the FDIC’s practice.


  • Encourage community banks to better compete with large banks by creating an incentive for community banks to create incentives for time deposits. Once upon a time, financial institutions provided demand deposit accounts (checking) and time deposits (savings accounts and CDs). An entire sector of financial institutions developed that provided only time deposits (Savings and Loans and Building Associations). People bought CDs or simply saved because the interest rates available were attractive and provided a risk free return.

A quick Google search showed that today, investors can achieve 4% plus interest rates for relatively short-term CD but over time, the average CD rate has declined precipitously –

average cd rates 1984-2023

Source: Bankrate


Note that in 1984, investors were able to buy CDs with yields over 11%. It’s interesting to note that yield on the S&P 500 in 1984 was -5.9%. That’s negative 5.9%.

Let’s step back and look at that in real dollars. $1,000 invested in a CD earned about $110 while the same amount invested in the S&P 500 lost about $60. This makes a strong risk-free return look quite attractive.

By 2009, CD yields fell below 1% and yields virtually evaporated in late 2021 with banks paying .09% for a 6 month CD. Let’s put that in real dollars: $1,000 invested in a CD earned the investor 90 cents Yes, 90 cents. This seems like a disincentive to invest in a risk-free time deposit when the S&P 500 yielded about 13% that year. Clearly, investors were not motivated by the risk-free almost zero interest rates provided by bank time deposits. For over ten years, CD yields were not comparable with yields of other investments.

We suggest that the Treasury provide a credit facility available only to community banks that would allow the banks to offer a minimum 5% time deposit with at least a 100 basis point return. As interest rates float up, banks would not need to activate the facility as their return would be sufficient to encourage banks to offer attractive time deposit rates.

How could this work? Through a repurchase agreement. The US Treasury sells a treasury instrument to community banks with a remaining term approximately equal to the term of CDs sold. Contemporaneously, Treasury enters into a repurchase agreement with the community bank to repurchase the instrument in the future for an amount that would provide the bank with a 100-basis point return for the term of the CD.

This approach is consistent with the Treasury’s current moves to reduce the supply of money through Quantitative Tightening.

While 100 basis points would not provide a windfall return for the banks, it would provide a profit for community banks and a minimum 5% return might encourage investors to fly from at-risk investments to risk free investments at banks.

Offering competitive rate time deposit options to consumers might cure another national problem. It might help the 10% of Americans with no savings and the additional 39% of Americans who report that their savings balances are less than they were one year ago begin or return to saving.


no emergency savings

Source: Bankrate


This solution might get America saving again.

silicon valley bank


By | Article, Insights

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The Silicon Valley Bank Failure

In “THE SILICON VALLEY BANK SAGA PART 1: WHAT HAPPENED? BY THE NUMBERS” we searched behind the popular press pronouncements to explore elements of Silicon Bank’s risky investment in long term treasury instruments and how these investments eventually contributed to the failure of the Bank.


Banking is Packed with Inherent Risks

Banks constantly face a variety of risks in the ordinary course of their business: in receiving deposits and originating loans or investing deposits for a return in excess of the cost of the deposits. The Office of the Comptroller of the Currency (OCC) has identified nine categories of risks banks face: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation.

Each day, Bankers must navigate this complex, shifting mine field of risks any one of which may be sufficient to sink the Bank.

As recently demonstrated by the Silicon Valley Bank failure, interest rate risk alone may be sufficient to cripple and eventually destroy a bank. In SVB’s failure, the sixteenth largest bank in the United States was unable to fend off a full-fledged bank run. It succumbed to a tsunami of withdrawals in only a matter of a few days.

The Bank’s end was swift and sure.


Who’s Responsible for Addressing Interest Rate Risk?

The short answer is: everyone in banking governance and management is responsible.

In a 2010 document “Advisory on Interest Rate Risk Management”, the FDIC sets out general standards for IRR management. Numerous subsequent pronouncements by each regulator reinforce the general framework expressed in this Advisory.

The Advisory admits the interest rate risks banks and bankers face ”The regulators recognize that some degree of IRR is inherent in the business of banking.”

Responsibility is then heaped on the Board of Directors –

“Existing interagency and international guidance identifies the board of directors as having the ultimate responsibility for the risks undertaken by an institution – including IRR.” (Emphasis added)

Senior management then gets its share of responsibility –

“Senior management is responsible for ensuring that board-approved strategies, policies, and procedures for managing IRR are appropriately executed within the designated lines of authority and responsibility.” (Emphasis added)

If you are reading this post, you likely have responsibility for conquering interest rate risk at your institution. Ominously, the penultimate paragraph contains an admonition regarding the failure of Directors and Managers to effectively manage IRR –

“Material weaknesses in risk management processes or high levels of IRR exposure relative to capital will require corrective action.”

History will determine the degrees of responsibility of the Board and Managers of Silicon Valley Bank bear in the Bank’s stunning failure.


What’s a Banker To Do?

In a section title “Risk Mitigating Steps” the FDIC provides some general guidance as to tools to manage IRR. Specifically, should IRR exceed or approach the institution’s limits “institutions can mitigate their risk through balance sheet alteration and hedging.”

Bankers should not wait until the risk threshold is in sight (or is behind them) to take action. Proactive balance sheet management helps banks avoid traps like the traps Silicon Valley Bank faced.

The next paragraph describes appropriate hedging activities but no guidance is provided regarding “balance sheet alteration.”

Bankers understand the asset side of the Balance Sheet. Assets revolve around two accounts: Cash and Loans Receivable.

Originating loans can be time consuming. Properly structuring loans may require expertise that is outside the bank’s skill set. Local loan demand may be insufficient to meet the bank’s lending needs. Loan servicing can be expensive and tedious.

Participate solves these problems. By providing a device-independent platform common to both Originators and Participants, participation communication is streamlined. Participation documents can be securely shared, and messages can be exchanged between Originator and Participant from within the Participate platform. The tedious back and forth process of agreeing on terms and executing Participation Agreements is handled with the click of a button. Standardized documents can be e-signed in a quick and seamless workflow.

The old participation slog can be reduced from days or weeks to minutes or hours.

Servicing is simplified. No more maintaining complex, error-ridden, non-audit friendly spreadsheets. Participants can opt-in to receive email and in-platform notifications each time a participation document is uploaded, a payment is disbursed to a participant or a draw and been processed and the participant’s share is requested. Printable forms contain wire instructions allowing them to be used as support for wire transactions by either the originator or the participant. They provide a firm audit trail.

Buying and selling participations allows banks to manage borrower concentrations, manage loan type and geographic concentrations and brings horsepower to the regulatory admonition to “mitigate risk through balance sheet alteration.”

Participate also provides a national marketplace for the purchase and sale of participations greatly expanding the scope of a bank’s contacts.


Talk to BankLabs 501.246.5148 or to discuss how we can help you manage interest rate risk.




By | Article, Insights

Failure Theories Abound

Silicon Valley Bank’s recent failure was capable of generating a systemic contagion that could have crippled economies worldwide. Rapid response by US regulators and monetary authorities avoided this close call, the likes of which may never have occurred in the economic history of the United States.

Fueled by rampant short selling, a plummeting stock price on the NASDAQ exchange and a full-blown bank run (some called it a “Bank Sprint”) driven into a frenzy by social media and instantaneous communication, Silicon Valley Bank spun out-of-control crashing ignominiously on an otherwise quiet Friday in early March 2023.

Financial pundits and financial know-littles had a field day with soundbites about the causes of the Bank’s failure. For example –

  • The Bad Management Theory – SharkTank contestant Kevin O’Leary called the management of SVB “idiots”. It subsequently came to light that companies in which O’Leary is involved had billions deposited at the bank.
  • Political Theory – Florida governor Ron DeSantis, who is expected to run for President in 2022 blamed the Bank’s failure on “WOKE politics”.
  • Off-kilter Cryptocurrency advocate Cointelegraph blamed the Bank’s failure on unnamed regulators’ conspiracy to destroy Cryptocurrency.

While the theories about reasons for the Bank’s failure are uncountable, any banker will tell you “The numbers don’t lie” and the numbers at Silicon Valley Bank foretold the likely implosion of the bank several years before the bank finally failed.


The Bank Grew at Implausible Rates

Founded in 1983, Silicon Valley grew steadily over the years with its “Dedication to Entrepreneurs”. By 2016, Silicon Valley was the 44th largest bank in the US. The bank’s relatively modest growth continued through 2019, however in 2020, the Bank’s growth exploded at eye-popping rates. From 2019 to 2020, the Bank grew from the 37th largest bank to become the 29th largest in assets.

The next year, the bank vaulted over fourteen other banks to become the 15th largest bank in the US.

FDIC Call Reports chart the incredible growth of the Bank. In the 2016-2020 period, assets had grown from $44 Billion to $114 Billion. Likewise deposits lept from $79 Billion to $206 Billion.

Silicon Valley Bank’s explosive growth did not halt there. In 2021, deposits grew 86% from $206 billion to $382 Billion almost doubling in a single year.

Silicon Valley was awash with cash.


Interest Rates Made Long-Term Treasuries Look Appealing

Banks primarily invest deposits in loans. Lending is the primary function of banking. “Excess” cash is often invested in government securities usually of a very short term to avoid interest rate risk and to roughly match the maturities of the securities with expected short term cash needs.

Silicon Valley flipped this formula with catastrophic results.

United States monetary authorities had maintained near zero interest rates for a prolonged period beginning with a precipitous drop in late 2008 in response to the Banking Crisis extending into late 2021.

Interest rates reached their nadir in late 2020 when the bell weather 10 Year Treasury Note fell to .64% –


interest rates graph

Source: Macrotrends

As long-term interest rates were falling, so were short term rates. 26 week T-Bill Coupon Equivalents yields almost vaporized, dropping to .11% during Q3 2020.

While both long and short term interest rates dropped and deposits gushed into Silicon Valley Bank, long term instruments maintained a substantially higher return than short term instruments –


2020-2021 Securities Loan growth

Silicon Valley Bank took the bait and bought long term treasury securities rather than lend the deposits or invest in short term instruments. From 2020 to 2021, securities holdings at SVB increased at a dizzying pace while loans grew at modest rates –

Interest rate increase 2022

Unfortunately for the Bank, interest rates, which had remained flat since early 2020, began to rise. In early 2022 in an effort to curb inflation that was running at 1970s-like rates, the Federal Reserve Bank began a series of seven rate hikes which would raise the Fed Funds Target Rate from almost zero to 4.25% – 4.5% in only nine months –

Interest rates increase 2022 table

Source: Board of Governors of the Federal Reserve System

As a result, a 10-year bond purchased at par in 2020 with a 1% coupon rate for $1 million would have plummeted in value to about $800,000 two years later when yields had risen to 4.5%. Silicon Valley’s massive securities purchases were worth substantially less than face value. And depositors were now withdrawing funds at massive levels.


The Bank Run Begins

While exact withdrawal rates are not available, the press has described the bank run as being driven by social media. Using Google search results as a proxy for interest in the Bank that was translated into withdrawal action by depositors, “Silicon Valley Bank” was a sleepy search term with nominal search activity until March 8 –

Interest over time graph

On March 8 – two days before the Bank failed – searches began to surge. By the day of failure search activity was at its peak –


google trends searches for silicon valley withdrawal

Sources: Google Trends

This proxy indicates that in only three days – the two days before and the day of the closing – the full-blown bank run was in progress. This conclusion is buttressed by news reports citing a single day withdrawal total at $42 Billion, leaving the Bank $1 Billion short of available cash to pay depositors.

To meet the withdrawal deluge, Silicon Valley Bank looked to their now heavily discounted long bond portfolio to meet liquidity demands. Selling at discounted prices would have effectively bankrupted the Bank. Unable to instantly raise equity, Bank management had now run face first into an insurmountable problem: Silicon Valley Bank, days before, the 16th largest bank in the United States was insolvent, had failed and required regulatory intervention to close the bank and end the bleeding.

On Friday, March 10, the California Department of Financial Protection and Innovation closed the Bank and appointed the Federal Deposit Insurance Corporation as the Receiver for Silicon Valley Bank.



What should Silicon Valley Bank have done to better manage the interest rate risk that eventually caused its failure?

Was the Bank’s failure inevitable?

What could Silicon Valley done to manage interest rate risk?



Talk to BankLabs 501.246.5148 or to discuss how we can help you manage participations and interest rate risk.

People with spreadsheets


By | Article, Insights

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The three primary regulators for US financial institutions – the Office of Comptroller of the Currency (OCC) for national banks, the Federal Deposit Insurance Corporation (FDIC) for community banks, and the National Credit Union Administration (NCUA) for credit unions – have recently promulgated guidance for member financial institutions regarding participation lending. 

Why this apparently recent interest in loan participations, financial vehicles that have existed formally in US banking since the dawn of federal regulation of banking in the 1930s? 

Despite the recent “good times” in US banking, primary regulators found it necessary to provide official guidance to member institutions to protect the safety and soundness of banks and credit unions. 

The reason is simple: risk.  

Let’s look at some high-level summaries of regulatory action with respect to participations. What is the history of participations? What are the risks and why are the regulators so interested in loan participations? 



Bankers that can recall the banking crises of the 1980s may recall that many experts cite loan participations in commercial real estate as a factor that exacerbated the meltdown of numerous banks and thrifts in a contagion-like fashion. The scope of the contagion shook the foundations of the US banking regulatory authority. 

Many of the troubled banks were involved in networks that bought and sold participations among themselves. When loans participated among the troubled banks developed performance issues, all the banks owning participation shares were affected. 

The participation “industry” at the time appeared to suffer from a lack of analysis of the various risk factors that can affect loans, especially credit risk accompanied by governance risk. Due to potential systemic risks in 1984, OCC issued a Circular “Subject: Purchase of Loans in Whole or in Part-Participations” that laid a foundation on which subsequent promulgations were based. 

Inter alia, the Circular identified various participation lending components that should be addressed to maintain safe and sound lending practices for the purchase and sale of participations. These considerations included adequate credit analysis and appropriate levels of transfer of credit information regarding the loan participated. The Circular also referenced recourse agreements between buyers and sellers, a hot issue in the participation market at that time. 

The Circular was rescinded by OCC’s 2020 Bulletin 2020-81 (infra) 



Regulators have developed a better understanding of the effects of relationships among institutions and the potential for systemic risks to the banking system due to these relationships created by participations.  

To provide guidance regarding participation risk, each of these primary regulatory bodies has promulgated guidance to member institutions regarding risks involved in participations. Financial institutions should refer to their regulator’s rules, policies, and guidelines for additional standards for the management of the participation process and associated risks. 

OCC: “Credit Risk: Risk Management of Loan Purchase Activities” 

This OCC Bulletin sets out a simple statement of purpose that permeates all primary regulatory guidance regarding participations: “A bank’s loan purchase activities would typically be handled in a manner consistent with its other lending activities, including sound risk management commensurate with the bank’s size, complexity, and risk profile.”  

An appropriate level of participation risk management would include: 

  • A strategic plan 
  • Addressing risk limits 
  • Setting-out policies and procedures for participation purchases 
  • An analysis of credit administration 

FDIC: “Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations” 

This 2015 Financial Institution Letter contains a similar purpose statement regarding participations. Institutions should underwrite and administer loan and loan participation purchases as if the loans were originated by the purchasing institution.” 

Member institutions were directed to develop loan policies that address participations, to understand the Participation Agreements they enter into, to perform appropriate due diligence, and to follow appropriate governance standards by obtaining necessary levels of approval before entering into the transaction. 

In separate guidance, the FDIC identified risks specifically relating to participations to include inter alia –  

  • Overreliance on the selling institution 
  • Inability to obtain timely information both in underwriting and loan administration 
  • Poor understanding of loss exposure when the loan underlying the participation is involved in a workout or institution liquidation 
  • Overreliance on recourse provisions contained in participation agreements 

NCUA 2019: “The ABC’s of Loan Participation Due Diligence 

NCUA Rules Section 701.22(b)(5) provides specific requirements for applicable loan participation policies. NCUA summarized the rules regarding the contents of participation agreements. These documents shall include specific information as to the parties and amounts, portions purchased and retained, document custodial location information, and duties and responsibilities of parties to the participation agreement. 



Contact BankLabs today to see how our patented end-to-end platform helps address risk and foster compliance with your participation portfolio. Email us at or call 501.246.5148. 


construct management

What Is Loan Syndication? What Are Its Benefits?

By | Article, Blog

Loan syndication is an effective way for large, complex borrowers to acquire funds for expansion, refinance of existing debt, or to purchase new assets. The loan syndication process allows lenders to pool their resources and create a reservoir of available funds more than what any single syndicate member would lend. Borrowers may be able to borrow more from a loan syndicate than they would be able to borrow through a single lender. Through loan syndication, lenders may be able to participate in loans to large borrowers with strong creditworthiness and diverse operations. These borrowers may be outside the geographical territories, lending experience, or relationship experience of some loan syndicate members. Lending risks may be lessened as they are shared by a pool of lenders. In this blog post, we’ll explore these topics in greater detail and discuss why using this method might be right for your organization.

Understanding Loan Syndication 

To form a loan syndicate the lead lender assembles other lenders interested in the cooperative lending arrangements referred to as a “facility”. Loan syndicates are governed by complex loan syndication agreements that detail the rights and responsibilities of the syndicate members. The lead lender – sometimes called the “syndicate agent”, “facility agent” or simply the “agent” – acts on behalf of all members of the syndicate that are participating in the credit facility. The agent arranges for the funds to be pooled and enters into loan and security agreements with the borrower(s). After the loan is closed, the lead lender collects payments, remits each syndicate member’s share, and takes action as necessary to protect the interests of the syndicate and its members. Debt syndication comes with its own set of risks and potential rewards.

Where Is a Syndicated Loan Typically Used?

Loan Syndication is commonly used in large-scale projects such as those in the infrastructure, energy, and real estate industries, where the size of investment often requires multiple investors for success. It is also used extensively where geopolitical considerations add complexity to the lending process (loans to foreign corporations, NGOs, political subdivisions, etc.) or the transaction involves currency exchange.

Differences Between Loan Participation and Loan Syndication Work

In loan syndication, relationships between the lenders are governed by a loan facility and the borrower deals with the syndication lenders as an entity through the agent. In loan participation, participants purchase interests in a loan originated by the lead lender and the borrower are not directly liable to individual lenders for performance under the terms of the loan. Each participant enters into a participation agreement with the loan originator or lead lender.

Considerations Involving Loan Syndications 

Borrower Terms – Loan Agreement

Large borrowers may be able to negotiate more favorable terms with a loan syndicate than would be available to them in negotiating with a single lender, however not all terms may be more favorable for the borrower due to the needs of the syndicate to protect the interests of all lenders. Likewise, lenders in the syndicate may secure better terms than would be available to them in a direct borrower-to-single lender relationship, however, the overall terms of the transaction must be considered as syndicate agreements may not include some terms and conditions lenders ordinarily include in their loan agreements and related documents.

Loan Amounts

Limitations on borrower concentrations imposed by regulatory bodies may increase the difficulty of large borrowers to secure funding in sufficient amounts from individual lenders. By borrowing from loan syndicates with pooled resources, these borrower concentration limits may be skirted and borrowers may find economies in the single-source arrangement provided by syndications. Lenders must remain mindful of direct and indirect exposures that may be partially masked by loan syndications.


Loan syndication may allow borrowers more flexibility in their financing and repayment strategies. This allows borrowers to tailor their debt structure to match their short-term and long-term financial goals. Additionally, loan syndication can also help borrowers consolidate their existing debts and take advantage of attractive interest rates or flexible terms thereby reducing their overall repayment burden.

Disadvantages of Loan Syndication

Long Loan Syndication Process

The length of the lending process is one of the biggest disadvantages of Loan Syndication. It may take an extended period of time to negotiate a loan syndication deal. Analyzing the situation, deriving optimal terms, and executing those terms on the best possible conditions all take significant effort, time, and expertise to complete. Also, due to the complexity involved with multiple lenders, negotiations may be difficult. This results in a longer timeframe for debt syndication which can be a major downside for borrowers seeking rapid access to financial resources.

Building Relationships is Difficult

Relationship management is a key component in debt syndication and it’s important for all parties to keep healthy working relationships that ensure a smooth process. It can be difficult for borrowers to maintain effective communication between all of these entities, leading borrowers and lenders to incur even more expenses and delays in the process.  

Syndicated Loan Market Participants

The syndicated loan market is a complex ecosystem that involves various participants. The key players in this market are the borrowers, lenders, and financial intermediaries. Borrowers are usually large corporations or governments that require a substantial amount of capital for their business operations or infrastructure projects. Lenders, on the other hand, can be commercial banks, investment banks, or institutional investors such as pension funds or hedge funds. These lenders provide the funds needed by the borrowers, either individually or as part of a group. Financial intermediaries, also known as lead arrangers, facilitate the syndication process by organizing the loan, underwriting the risk, and distributing the loan to other lenders. In addition to these primary participants, there are also secondary market participants such as loan traders and loan servicing agents who play a role in trading existing syndicated loans or managing the loan portfolios. Overall, the syndicated loan market participants work together to ensure the efficient allocation of capital and meet the financing needs of various borrowers.

Parties Involved in Loan Syndication

Loan syndication involves multiple parties working together to provide funding for a borrower. The main parties involved in loan syndication are the borrower, lead arranger, participating banks, and investors. The borrower is the entity seeking funding and is responsible for repaying the loan. The lead arranger, usually a bank, acts as the intermediary between the borrower and the other parties. They structure the loan, negotiate terms, and coordinate the syndication process. Participating banks are other financial institutions that join the syndicate and provide funds to the borrower. They may have different roles and responsibilities depending on their level of involvement. Lastly, investors, such as institutional investors or private equity firms, may also participate in the syndicate by purchasing loan participations. They typically seek to diversify their portfolios or earn attractive returns. Loan syndication allows for the sharing of risks and rewards among the various parties, enabling large and complex financing transactions to be executed efficiently.

Types of Loan Syndication

Loan syndication is a process in which a group of lenders pool their resources to provide a loan to a borrower. There are two main types of loan syndication: lead arranger syndication and participant syndication. In lead arranger syndication, one bank takes the lead role in structuring the loan and negotiating the terms and conditions with the borrower. This bank also underwrites a significant portion of the loan and invites other lenders to participate in the syndicate. The participating banks, known as participants, contribute a smaller amount of the loan but share in the credit risk and interest income. On the other hand, in participant syndication, there is no lead arranger; all lenders contribute equally to the loan and share the credit risk and interest income accordingly. The choice between lead arranger and participant syndication depends on the complexity of the loan transaction, the borrower’s relationship with the banks, and market conditions. Both types of loan syndication provide lenders with an opportunity to diversify their loan portfolios and reduce their exposure to credit risk.

Conclusion About this Type of Loan

Ultimately, loan syndication allows large, complex borrowers to borrow from a pool of lenders. Due to the complexity and size of credit facilities, both lenders and borrowers should exercise caution when entering into loan syndications. With its multiple benefits, it’s easy to see why more than 4.5 million borrowers in the U.S. choose loan syndication over traditional, single-lender bank loans as their source of financing.  If you are a financial institution that wants to have a flawless process, it is best to use a reliable bank lending platform that can streamline your administration and processes. Reach out to BankLabs today to find out how you can benefit from different types of loan syndication services for both your short-term and long-term cash flow strategy needs.  

business meet

Understanding Syndicated Loans

By | Article, Blog

When managing a growing business, understanding how to handle financing and investment can be challenging. Syndicated loans are a great option to scale up your enterprise with the need for additional capital. Companies can access larger sums of money; even goals previously considered unattainable are within reach. 

Let’s explore synergistic strategies from major intermediaries as well as the value of risk analysis, so your business can make smart decisions whenever it needs capital for expansion plans.

What is Syndicated Loan Financing?

A syndicated loan is a very popular financing tool for large companies that need to borrow a significant amount of money. It involves banks or other financial institutions teaming up, or syndicating, to offer high-value loans. 

These loans come with advantages such as lower interest rates and fees than if the business had approached one lender alone. By borrowing with a syndicated loan, businesses can also benefit from the collective expertise of multiple lenders who better understand their industry and finances. 

This type of loan is commonly used by corporations looking to strengthen their ties with organizations they trust and can collaborate on investment strategies together.

How Syndicated Loans Works

Syndicated loans allow large organizations to access capital and longer repayment terms, usually by issuing bonds or shares of stock. The syndicate is managed by one or more lead banks, and each institution involved in the financing puts up an amount they are comfortable with. 

Each lender will typically be repaid based on their percentage in the syndicate when the loan is repaid. The unique thing about syndicated loans is that all lenders are then able to manage their individual risks collectively rather than having each lender take on the entire risk alone. 

This makes it easier for the borrower to receive a larger loan with more favorable rates from the lenders involved. Syndicated lending also enables banks to make multi-million-dollar investments without taking too much of a risk or becoming over-concentrated in one particular sector. 

This model of pooling investor assets works great when arranging large loans, as it allows investors to benefit from economies of scale while still minimizing individual risks.


Syndicated Loan Process

The syndicated loan process is utilized by banks when a large amount of financing is needed. Essentially, multiple lenders from separate financial institutions pool their resources together to provide a borrower with the capital they require.

An agent bank acts as an intermediary for the grouping of lenders. This simplifies the syndication process and makes it more organized by allowing communication and decisions to funnel through one entity as opposed to several at once. It is important to note that from the outset, individual identity and roles within the syndication must be clearly defined to ensure that all involved parties are on the same page throughout the entire process.


What are the types of syndicated loans?

Syndicated loans are an attractive option for those looking for financing that can grow and change over time. Syndicated loans come in numerous forms, each with its own quirks and features tailored to the needs of various businesses.


1. Underwritten Deal

It is a type of syndicated loan agreement in which multiple financial institutions are involved, and each institution agrees to provide financing to the borrower. These loans provide borrowers access to more capital than would otherwise be possible with a single lender and function as a way for businesses and organizations to access substantial amounts of money quickly.

They also provide more security for lenders than other financing options since numerous entities share any associated risk. Despite this, syndicated loans can require more time and paperwork than alternative options, so those looking for financing should choose the option best suited to their situation.


2. Club Deal

A syndicated loan Club Deal is a financial agreement between a number of banks that allows them to provide a large loan to an entity jointly. These loans can range in size but often consist of extremely large amounts of money with terms up to 10 years or longer. 

Club deals have become more popular over time due to the increased complexity and size of some business transactions such as mergers and acquisitions. By pooling funds together, the risk associated with these transactions is spread across multiple entities while all parties involved are able to share the benefits collectively. 

Additionally, it ensures that multiple institutions are offered an opportunity to partake in lucrative deals even if they can’t fund them on their own. This type of structure has allowed many successful businesses around the world to expand and carve out their success in competitive markets.


3. Best-Efforts Syndication Deal

It is an agreement in which an investment bank issues and sells securities on behalf of the issuer. They target qualified institutional buyers (QIBs) and put their best efforts into marketing the security. The deal allows for the issuing company to get immediate access to capital by leveraging their balance sheets. This type of transaction is a more efficient way of financing than seeking individual equity investors or taking out a loan. 


Who Can Avail Syndicated Loan?

Anyone in need of financing, including companies, governments, and other organizations, can avail of a syndicated loan depending on their creditworthiness. 

The lenders provide the capital, while the borrower has to provide agreed-upon collateral in exchange for the loan. 

While the amount, interest rate, and duration of the loan syndications depend on individual negotiations, typically multiple lenders will share the risk among themselves to make sure that the mutually agreed upon obligations are fulfilled. 

Why do banks prefer syndicated lending?

Syndicated lending contracts represent a practical solution for banks when faced with loans that are simply too large to fund on their own. Depending on the loan size, several banks can come together to share the risk of default while also pooling resources to reduce their individual costs. 

They also offer access to a larger capital base which results in better interest rates and longer repayment periods. Banks are thus able to make more profitable investments with greater flexibility, allowing them to capitalize on any opportunities that arrest their attention along the way.

Enhance Your Banking Operation with Banking Tools

Every banking operation needs the advantage of time-saving tools and solutions to help it move faster and smoother. Utilizing the right tools enhances an operation quicker than before and helps increase efficiency and accuracy throughout the entire process. 

By investing in tools like automated tracking or scanning solutions, your staff can save money by reducing labor costs associated with manual operations. 

Not only that, but customers are likely to appreciate having access to self-reporting solutions for their accounts. Investing in technology will ultimately enhance your banking operations as you can more effectively keep up with customer service demands while maintaining accurate records an

d data. 

Looking For Innovative Tools for Your Bank?  BankLabs Is Here!

Is your bank planning to venture Into syndicated loans? If yes, then BankLabs is all you need, It is no secret that technology plays a huge role in making sure your banking needs are met. From mobile banking to setting up payment plans, a wide range of tools can help you manage your finances and ensure your financial goals become reality.

BankLabs was founded with a focus on driving innovation into the banking industry. We recognized that traditional methods such as spreadsheets were no longer enough and sought to harness revolutionary programming techniques to propel an ever-modernizing world forward. 

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Important Process of Loan Syndication

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The process of loan syndication can be a bit daunting, but it’s important to understand how it works in order to get the best possible financing for your project.

In a nutshell, loan syndication is when multiple lenders come together to provide funding for a single loan. This allows for greater flexibility and more favorable terms than if you were to secure financing from just one lender.

Here’s a closer look at how loan syndication works and what you need to know about the process respectively:

3 Phases of Loan Syndication

1. Pre-Mandate Phase

The pre-mandate phase is a crucial part of the loan syndication process, as it determines many parameters that impact both lenders and borrowers. Loan syndication typically begins with an initial assessment of the borrower’s needs and financial history. This includes the necessary requirement or the documents that the borrower has to present to the bank or any financial institution. These may include loan syndication contracts, loan credit information

Once this assessment is complete, a market-sounding phase can be conducted in order to identify potential lenders and assess the capital requirements for the loan. All this groundwork sets up the next stage of the process so all those involved can move quickly during later negotiations on the loan mandate.

2. Intermediary Phase

The intermediary phase of loan syndication is a crucial part of ensuring smooth loan origination and processing. During this stage, an intermediary financial institution takes the lead in overseeing the coordination of all parties throughout the entire process.

It includes the lenders, borrowers, attorneys, and other financial institutions involved. Primarily, their primary task is to ensure that clear communications are taking place between all parties and that all regulatory requirements are met informally so as not to cause any disruption to the loan syndication process.

Ultimately, the intermediary phase bridges the gap between initial negotiation meetings and to successful completion of the loan. It is an essential component for the seamless dispersal of funds from multiple financiers and ensuring everyone remains in line with local legal regulations.

3. Post-Closure Phase

The post-closure phase of loan syndication is a crucial period that requires the financial institution and other involved parties to maintain close communication. Once the funding process has been completed, account managers will typically maintain contact with borrowers and lenders, ensuring both sides stay abreast of upcoming repayment schedules and loan performance reviews.

Understanding the conditions of each syndicated loan agreement, and interest rates, and satisfying all terms are essential during this stage, as any missed deadlines can quickly lead to default. To help protect against this eventuality, borrowers should monitor their payments closely in order to ensure that all expectations outlined by their lender group have been fulfilled.

This would enable them to identify any potential issues or discrepancies at an early stage and take steps to avoid defaulting on the loan. By following this approach, the post-closure phase of loan syndication can remain free from any costly pitfalls.


How to Choose the Best Digital Banking Platform to Help You With Syndicated Loan Process?

With so many digital banking platforms on the market, it can be tough to know which one is right for your needs. However, by taking the time to assess your options and understand what each platform offers, you can make an informed decision about which digital banking platform will best suit your needs. Here are a few factors to consider when choosing a digital banking platform.

When it comes to syndicated loans, it is very important to have a reliable tool or solution to improve the syndication process.

Here are the best pointers on how to find the best  banking solution: 

Research the different digital banking platforms available

It has never been easier to conduct financial transactions with digital banking platforms. From checking balances to making deposits and transferring funds, there are a variety of easy-to-use options available online. 

Additionally, many banks offer complimentary mobile applications which can provide additional access and convenience when conducting transactions. Taking time to research the different digital banking platforms available can be beneficial in choosing one that fits your lifestyle and meets your expectations.

Researching different digital banking platforms can help you select the one that works best for your particular needs.

Consider what features are most important to you

Banking solutions for banks are critical for a successful modern business. From secure digital transactions to comprehensive financial tracking, high-quality solutions provide the necessary platform for handling customer accounts and funds.

Banks often utilize features like automated payments and notifications, streamlined accounts, and the ability to deposit checks remotely to serve their customers better. Some banking solutions also feature fraud protection and analytics capabilities, which help banks recognize liabilities and quickly flag suspicious activity.

With such innovative tools, banks can ensure the security of their customers’ transactions while keeping pace with rapidly advancing technology.


Look for user reviews and compare ratings

When choosing a banking solution, research can pay off. Taking the time to read user reviews and compare ratings of various programs can make all the difference. Doing so can provide useful insight into what features to expect, what other users think about the product or service, and how satisfied customers are with the vendor’s customer service.

This can be especially helpful when deciding between two similar options or if you have limited experience with either banking solution. A few extra minutes spent comparing and contrasting user reviews and ratings can bring peace of mind and an informed decision when it comes to selecting a banking solution.

Decide which platform is best for your needs

Choosing the right platform for your needs can be a daunting task. There is no one-size-fits-all solution, as everyone has different requirements and preferences. It is important to research all potential platforms thoroughly to ensure that they meet your criteria, such as features, functionalities, cost, and ease of use.

Moreover, make sure you understand how the platform can be integrated into your existing workflow and systems. Taking the time to assess the best fit for you will pay off in extended productivity and fewer technical issues down the line.

Create an account and start using it!

Banking digitally has many benefits and is becoming more popular as technology improves. When it comes to choosing the best digital banking solution for your bank, an essential factor to consider is customer service – you want the platform to offer options that make the end user’s experience fast, easy and secure. 

With so many options available, it can be difficult to choose the right digital banking platform for your needs.\You just have to search for the best and appropriate one. Once you’ve found the right one, creating an account is easy, and then you can start using all the great features it has to offer!

Looking for a great digital banking platform? BankLabs offers everything you need and more. Contact us today to learn more about our excellent banking solutions.


Diversifying Secondary Loan Participation

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By diversifying their portfolio, banks are better positioned to protect themselves from the risk associated with concentrated industries.


Syndication of secondary loan participation is a form of loan financing that allows multiple lenders to participate in a single transaction. This arrangement helps banks and other institutions access large amounts of capital, often in ways they couldn’t have done on their own. It also helps companies engage in transactions that are not possible through conventional lending channels, such as mergers and acquisitions.

In syndicated lending, all lenders sign the same loan agreement and their liability is limited to their share of the loan’s interest. In addition, most loan terms are uniform, although collateral assignments are typically assigned to different assets. This arrangement allows individual lenders to provide large loans while still retaining a prudent level of credit exposure.

A syndication contract consists of a series of commitment contracts. Each participant makes an initial commitment to fund an installment of the loan and subsequently makes a commitment. These commitments are known as tranches, and each tranche represents a specified portion of the total loan. During the term of the contract, each participant fulfills its commitment.

The syndicated loan market has developed rapidly in recent years, attracting new institutional investors. This has led to a surge in the volume of loans traded in the secondary market. As a result, it has become one of the most innovative forms of capital markets today. And it continues to grow, with the volume of loans traded annually reaching $743 billion. The demand for secondary loans is expected to grow even more, and new lenders will continue to emerge to fill the gap.

A syndication contract can contain as many or as few tranches as required. Each tranche will have a borrowing customer and a group of participants, some of which will be common, while others may be unique. Each tranche is under a commitment contract that outlines the ratio of participation among participants.

Loan participation

Secondary loan participation offers financial institutions a way to increase loan volume, diversify risk, and enhance earnings. However, it is imperative to follow due diligence procedures and maintain active oversight throughout the life of the loan. It is also important to sign a comprehensive participation agreement to minimize any potential risks and ensure the success of the loan.

The main characteristic of loan participation is that the ownership interest is transferred to multiple entities, including several banks. One of the participating banks, called the lead bank, retains a partial interest in the loan and holds the loan documentation in its name. This bank then deals directly with the customer. Although the participants may believe that the lead bank has the primary responsibility of credit risk management and underwriting, regulators require each participating bank to have a robust risk management program.

Secondary loan participation is a common practice in the secondary loan market. It is a method of selling loans, where one bank purchases another’s interest in a loan. The participating banks then share the risk. The lead bank originates the loan and closes it, while the other banks purchase ownership interests. This arrangement helps all participants share in the credit risk, while preserving the anonymity of the lead bank.

Loan syndication has become an increasingly popular method of financing for commercial real estate. It allows lenders to diversify their revenue streams and enter new markets. It also helps them manage risk and reduce capital weight. It also provides lenders with an opportunity to offer financial accommodations to valued clients. Additionally, it permits lenders to engage in transactions that might otherwise be prohibited by lending policies.

Loan portfolio sale

A Secondary loan participation portfolio sale involves selling a portfolio of loans. These portfolios are typically made up of various types of loans as well as equity and hedging assets. This Practice Note outlines the parties involved, the likely motivations for making such a transaction, and the typical process involved.

A loan portfolio sale is a process in which multiple loan assets are sold to another investor. These sales are typically conducted for similar reasons as a single asset debt trade. The seller may wish to sell some or all of their assets, and in both cases, the transaction is documented through a bespoke sale and purchase agreements that borrow some of the characteristics of LMA secondary trading documentation.

The Secondary loan participation market is relatively new. Before the creation of this type of transaction, bank loans were considered nonmarketable securities and could only be sold as contingent liabilities. The current secondary loan participation market has created a new business model for removing these nonmarketable assets from a bank’s balance sheet.

A secondary loan participation portfolio sale is an important step for financial institutions looking to reduce their loan risk exposure and improve their profitability. It allows institutions to diversify their loan portfolios and gain access to a new segment of the lending market. Moreover, participating in loan transactions also allows for additional income streams, such as gains on sale and servicing income.

Security interest

Security interest in secondary loan participation agreements differs from traditional securities in several ways. In most cases, they do not confer an ownership interest to the participant. In addition, they do not create a lien on the underlying loan. However, in some cases, participation in secondary loan markets does confer an ownership interest.

As the syndicated loan market has grown in the past few years, the increased presence of secondary market transactions has caused concerns about the status of syndicated loans. 

In the secondary loan market, participations are a common tool for lenders to use to facilitate lending and manage risk. These agreements are commonly used by banks and independent finance companies. 

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What is a Loan Syndication?

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Loan syndication is an alternative loan arrangement in which the lenders pool their loan portfolios into one large loan. These lenders share the risk and rewards of the loan. This structure helps individual lenders provide large loans while limiting their credit exposure. Individual lenders are still involved in the syndicated loan process, but the loans are generally much larger than they would be if they were lending on their own.


Syndication of loans is a type of loan where two or more lenders come together to make a loan for a single borrower. This allows the lenders to share the risk and the loan amount. The process allows for large loan amounts while maintaining prudent credit exposure. It is often used in small-business financing.

The retail market for syndicated loans is dominated by banks, finance companies, and institutional investors. Compared to Europe, the balance of power between these groups is different in the U.S. Syndicated loans are heavily dependent on credit quality and institutional investor appetite. Banks continue to dominate the market, though institutions have become significant players over the last decade.

The loan syndication process is generally structured in three phases. First, the borrower submits a loan request to a lead bank, which then seeks out other financial institutions to participate in the loan syndication process. Throughout the process, the lead institution conducts an appraisal of the loan application and develops a credit proposal for the borrower.

Syndicated loans are large loans made to borrowers by several banks. Typically, one bank is the lead bank, which takes a percentage of the loan and syndicates the rest to other banks. These loans are similar to participation loans, except they involve more than two banks.

Syndicated loans

Syndicated loans are loans arranged and structured by a group of lenders. A lead arranger is responsible for administering the loan. These lenders provide the money to the borrower. There are many types of syndicated loans. The main difference between a syndicated loan and a traditional bank loan is its structure.

Syndicated loans are structured as credit lines or as fixed amounts. Their interest rates are fixed or tied to an industry standard. This type of loan is a good choice for large borrowers who need large amounts of money for projects or mergers. Syndicated loans also help large borrowers maintain a positive market image. This helps the borrowers improve their credit scores, which means they can access larger amounts of credit in the future.

Syndicated loans are made between different financial institutions, and lenders can take an interest in one or both tranches. The lenders of syndicated loans get to know each other and become more familiar with each other’s business. This gives borrowers a larger pool of lenders to choose from. These lenders will work with the borrower to negotiate the terms of the loan.

A lead bank acts as an agent between the lender and the borrower. It holds the authority to oversee the loan and communicate with all the lenders. It also has responsibilities for managing the loan, including ensuring compliance with contractual obligations and overseeing any breach of contract.

Syndication agreement

A syndication agreement for loan syndication is an agreement that binds all parties to share the risk and rewards associated with loan syndication. These agreements are typically negotiated through a syndication process, in which the lead bank identifies participants who pool their funds to provide funds for a borrower’s loan application. Once the loan is approved, the lead bank disburses the loan, sharing the proceeds of the loan with the participants in a set ratio.

Syndicated loans are designed to reduce the risk associated with lending, spreading it among several institutional investors and financial institutions. This reduces the risk associated with default and allows for more favorable lending terms. While there are many advantages to loan syndication, there are several aspects to be considered before entering into a syndicated agreement.

First, a loan syndication agreement must specify the terms and conditions for each party. In some cases, this can be complicated. It may include market-flex contractual language, allowing for shifts in pricing depending on investor demand. This type of language is now standard in syndicated loan commitment letters.

Syndication banks

Syndications are often used for large loans, and the banks that participate in them can share the risks. The banks in the syndicate are each responsible for a certain portion of the loan, and they can all manage the loan from a single point of contact. Syndications can also benefit the borrower by reducing the amount of paperwork and time spent on negotiations.

The loan agreement in a syndicated loan facility is for a single loan, with each lender having a fixed amount of liability, typically a portion of the loan interest. While the loan agreement terms are typically uniform across the lenders, collateral requirements may differ. The main purpose of a syndicated bank facility is to spread the risk of default among a number of lenders, allowing individual lenders to provide large loans while maintaining manageable credit exposure. Syndicated loans are commonly used to fund mergers and acquisitions, large corporate takeovers, and capital expenditure projects.

Syndication loans are a type of private lending that combines various types of loans and other types of lending. Syndications are created when several lenders pool their funds to provide financing for a specific project. Each participant contributes a percentage of the total loan amount, assuming the risk of the entire loan. The lenders work together to reach an agreement on the repayment terms of the loan.


Broadly Syndicated Loans

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Generally, broadly syndicated loans have more lenient covenants than other types of loans. For example, eighty percent of broadly syndicated loans are “saratoga” loans, which do not impose minimum annual cash flow requirements. This reflects more lenient market conditions than traditional loans, which often require a minimum cash flow requirement.

Leveraged loans

Leveraged loans are broadly syndicated debt instruments issued by financial institutions to non-investment grade companies. These loans can be used for general corporate purposes, such as refinancing existing debt, recapitalization, and leveraged buyouts. Leveraged loans have several advantages over non-leveraged loans.

The total leveraged loan market is just under $2 trillion, with $1.3 trillion of that total held by institutional lenders. Leverage levels are steadily creeping higher. Most leveraged transactions have a total leverage of 5.5 times, with 4.6 times coming from first lien loans. This level has continued to increase in recent years, and the highest twenty percent of leveraged borrowers have leverages of at least 6.25 times.

Leveraged loans have several risks associated with them. For one, covenant-lite loans lack an early warning mechanism and prevent lenders from re-assessing loans before they default. Another risk associated with these loans is regulatory capital arbitrage. This practice allows institutions to manipulate risk by lowering their capital requirements. Furthermore, increased competition among ratings agencies creates rating shopping and raises questions about the accuracy of leveraged loan ratings. As a result, it is hard to assess the health of the leveraged loan market.

Leveraged loans have been growing steadily since their inception. Today, they constitute a large portion of the loan market, with the total size of leveraged loans exceeding $1tn. As a result, they are a significant contributor to the funding needs of private companies.

Syndicated loans typically involve large sums of money and are offered by multiple financial institutions, thereby spreading the risk of default among several financial institutions. In addition, syndicated loans often have a lead bank that puts up a larger share of the loan and performs administrative tasks. These administrative tasks can take up a large portion of staff time, and most lead banks invest in loan administration software to help ease the workload and increase accuracy.

Free-and-clear tranches

Free-and-clear tranches are a relatively new innovation in broadly syndicated loans. They emerged from the proliferation of covenant-lite loans in the market. Lenders expect their use of free-and-clear tranches to fluctuate with market conditions.


CLOs, or collateralized loan obligations, are complex structures that combine several elements in order to provide investors with an above-average return on investment. These instruments are made up of several tranches of underlying loans, which are then ranked according to risk. Though some CLO tranches are leveraged and below investment grade, most are rated investment grade and benefit from diversification, credit enhancement, and subordination of cash flows.

The risk associated with CLOs increases as they become larger and represent a higher percentage of the total debt structure. For instance, $10 million of senior secured loans is more likely to be fully covered in bankruptcy than $90 million. Another factor is the industry segment in which the CLO is issued. Some industries go in and out of favor, while others remain highly desirable.

Broadly syndicated loans are generally backed by cash flows and are typically used to finance acquisitions, mergers, and recapitalizations. They are among the most common leveraged bank loans, and are also the most common type of collateralized loan obligation. The market for these instruments is dominated by banks, securities firms, and institutional investors.

Fees associated with CLOs vary. While most lenders receive a percentage of the final allocation, some pay a fixed upfront fee. Typically, this fee is between 12.5 bps and 25 bps. However, this fee can be tied to the commitment of the investor.

A key part of CLO management is overseeing cash flows. This is important because the cash flows of CLOs are distributed through a multi-tranche structure. Each tranche has its own unique set of covenants that require the manager to monitor and test the performance of the portfolio monthly. Using these covenants, the manager can adjust the portfolio as the market changes.


Revolver broadly syndicated loans are a type of secured loan that a borrower may take out to fund a business operation. These loans are secured by the company’s assets, such as accounts receivable and inventory. Typically, the borrower takes out a 1st lien on the asset used to calculate the amount of the loan, and can also include other assets as collateral.

These loans are structured to allow borrowers to draw down on the credit line, repay it, and then draw more money off the line. The borrower is then charged an annual fee for any unused amounts. Revolver broadly syndicated loans are most commonly offered to institutional investors, such as pension funds, mutual funds, insurance companies, and hedge funds.