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 Loan Syndication 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 Syndication and Loan Participations
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
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.
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
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.
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.