Syndicated loans are used when a borrower wants to borrow more than its bank is prepared to lend. The bank will pull together a syndicate (pool) of other banks to join in the lending. Syndicated lending is the backbone of international commercial banking.
The syndicate banks lend will to the borrower on the same terms as each other using the same loan agreement but there are additional roles made necessary by the fact that the lender is not one but several banks. The arranger is the bank awarded the mandate from the borrower (the instruction from the borrower to put together the loan). The arranger commits to the borrower to make the loan, then sells down its commitment with the help of a book runner/syndicate coordinator (in large syndications these will be different banks) whose job is to make the syndication happen: the arranger tells the book runner how much exposure to the borrower it (the arranger) wishes to retain and the book runner gets rid of the rest. Then there’s the agent bank which collects interest and repayments from the borrower and distributes them to the syndicate, monitors the borrower’s financial covenants and administers waivers and amendments to the loan documentation.
A key clause in a syndicated loan agreement is the sharing clause which says that if any bank receives a payment from the borrower, it will share that payment with the other syndicate members. This is to prevent the borrower from preferring one lender over another, for instance if the borrower has a separate bi-lateral loan with one of the syndicate banks.
Providers of Syndicated loans in Nigeria
Syndicated Loan and bond structures
Syndicated loans are usually a bit more expensive than a bond issue (cheaper to arrange but carrying a higher interest rate) because it is difficult for a bank to get out of a loan or sell it on once the loan has been made.
So the syndicate members can be stuck with the borrower for the term of the loan and want to be rewarded for that risk(whereas a bondholder can just sell the bond in the market to get rid of that particular exposure). But there are times-depending on the yield curve, the state of the banking industry and so on when syndicated loans are cheaper for borrowers than bonds. In any event they offer a different source of funds.
Originally, syndicated loans were arranged by commercial banks and bond issues by investment banks. They used different mechanisms. Now global banks do both, the way they are done has converged. In both cases you can have bought deals where the lead bank agrees to provide all the funding then syndicates to other lenders subsequently- this can be done on an absolute basis, best efforts or reasonable basis (the first means the bank has to; the last that it only has to use reasonable endeavors to do so and if it cant the loan is cancelled).
An example of how the syndicated loan and bond markets have converged, using similar techniques to achieve syndication, is market flex. The loan market has taken market flex from the bond market- it means that the final price and structure are only arrived at aftermarket soundings have been taken (rather than being fixed prior to syndication). This is often built into the term sheet (the memo the lender and borrower sign which highlights the terms to be put in the full loan agreement). This means the bank can change the pricing and other key terms if necessary to achieve successful syndication.
Bond documentation tends to be simpler, more standardized and the covenants less demanding. This is because bondholders can always sell in the market if the borrower’s credit-standing deteriorates, whereas traditionally lenders were stuck with a loan come what may so required more comprehensive protection. But loans can be more flexible because it is easier for a borrower to negotiate with its lenders if it gets into difficulties than for an issuer to do so with bondholders (since the issuer won’t know who they are because no register is kept).
Some bond structures overcome s this by providing for a trustee to represent bondholders’ interests should renegotiation after issue be required. But appointing a trustee adds a further cost that most issuers prefer to do without. Of course, loans that are securitized into bonds suffer from the same problem (not knowing who the holders are). This means that confusion arises on the point of default because of so-called leaderless credit groups.