INTRODUCTION

As India Inc. goes on a capital expenditure and expansion spree, the financial system is witnessing a
subtle change in the way credit is mopped up. More and more corporates are looking at loan
syndications - a common phenomenon in the West. There has been a sharp rise in loan off-take
recently, with the credit growth being 21% for 07-08 over the previous year
"Syndication is an arrangement where a group of banks, which may not have any other business
relationship with the borrower, participate for a single loan."
"A syndicated facility is a lending facility, defined by a single loan arrangement, in which several or
many banks participate."
The standard theory for why banks join forces in a syndicate is risk diversification. The banks in the
syndicate share the risk of large, indivisible investment projects. Syndicates may also arise because
additional syndicate members provide informative opinions of investment projects or additional
expertise after the funding has been extended.
In other words - if a company wants a huge amount as a loan for expansion or any other purpose, say
when Reliance or ITC wants money, loans are got from the banks. But generally, it’s got from a
single bank and that single bank alone shares the risk.
Take the case of funding a rocket launch - if the launch is a failure, then the bank which funds for it
may become bankrupt. But in syndication, many banks come together and fund a single project, hence
sharing the risks. This also assists in getting competitive interest rates for the banks. Generally, when
a group of banks get together, they select a lead bank which handles all the dealings with the
company, such as negotiating the interest rates, and hence a deal is signed between the company and
the banks. Loan syndication is basically done to share the total loss or liability.
Typically, syndicated loans are structured as term loans or operating revolvers. However, they may
also include tranche or segmented structures, letters of credit, acquisition facilities, construction
financing, asset-based structures, project financing and trade finance.
WHEN DOES A CORPORATE GO FOR SYNDICATION?
Corporates opt for syndication when: -
 The borrower wants to raise large amount of money quickly and conveniently
 The amount exceeds the exposure limits or appetite of any one lender.
 The borrower does not want to deal with a large number of lenders
Traditionally, loan syndication was practiced in Europe. Euro syndicated loan is usually a floating
rate loan with fixed maturity, a fixed draw down period and a specified repayment schedule. One, two
or even three banks may act as lead managers and distribute the loan among themselves and other
participating banks. One of the lead banks acts as the agent bank and administers the loan after
execution, disbursing funds to the borrower, collecting and distributing interest payments and
principal repayments among lead banks, etc. A typical Euro credit would have maturity between 5 to
10 years, amortization in semi-annual instalments, and interest rate reset every three or six months
with reference to LIBOR.
Syndicated loans can be structured to incorporate various options, e.g., a drop lock feature converts
the floating rate loan into a fixed rate loan if the benchmark index hits a specified floor. A multi-
currency option allows the borrower to switch the currency of denomination on a roll-over date.
Security in the form of government guarantee or mortgage on assets is required for borrowers in
developing countries like India.
Some of the important roles in Syndicated Loans include: -
Arranger / Lead Manager: The lead manager is a bank that is awarded the mandate by the prospective
borrower and is responsible for placing the syndicated loan with the other banks and ensures that the
syndication is fully subscribed. They are entitled to the arrangement fee and undergo a reputation risk
during this process.
Underwriting Bank: It is the bank that commits to supplying the funds to the borrower - if necessary
from its own resources if the loan is not fully subscribed. The lead manager or another bank may play
this role. Not all syndications are underwritten. The risk is that the loan may not be fully subscribed.
Participating Bank: This bank participates in the syndication by lending a portion of the total amount
required. It is entitled to receive the interest and the participation fee. But it, however, faces risks such
as: -
* Borrower credit risk
* Passive approval and complacency
Facility Manager / Agent: This bank takes care of all the administrative arrangements over the term of
loan, e.g., disbursements, repayments, compliance. This bank acts on behalf of all the banks
participating. This may be either the lead manger or the underwriting bank.
STAGES INVOLVED IN THE PROCESS
Premandate Phase: The prospective borrower may liaise with a single bank or it may invite
competitive bids from a number of banks. The lead bank identifies the needs of the borrower, designs
an appropriate loan structure, develops a persuasive credit proposal, and obtains internal approval.
The mandate is created. The documentation is created with the help of specialist lawyers.
Placing the Loan: The lead bank can start to sell the loan in the market place. The lead bank needs to
prepare an information memorandum, term sheet, and legal documentation and approach selected
banks and invite participation. The lead manager carries out the negotiations and controversies are
ironed out. The syndication deal is closed, including signing of the mandate.
Bilateral Loans Syndicated Loans Bond Markets
Similar to syndicated
Loan Size Lowest Larger loans
Public Disclosure Lowest Medium Highest
Driving Factor Relationship Relationship or transaction Transaction
Extensive and frequently Extensive but less frequently
Covenants negotiated negotiated Rarely negotiated
Borrowing Rate Floating rate Floating rate Fixed rate
Revolving credit or fully Revolving credit or fully funded
Funding funded term loan term loan Fully

Post Closure Phase: The agent now handles the day-to-day running of the loan facility.
GRAPHICAL REPRESENTATION – PROCESS OF SYNDICATION

TYPES OF SYNDICATED LOANS –

•Revolvers -behave like credit cards -Can draw down, repay and reborrow
•Term loans -behave like mortgages -Draw down once, repay in instalments

TRENDS:
BENEFITS OF LOAN SYNDICATIORS FOR BORROWERS
Syndicated loans provide borrowers with a more complete menu of financing options. In effect, the
syndication market completes a continuum between traditional private bilateral bank loans and
publicly traded bond markets. This has resulted in a more competitive corporate finance market,
which has permitted issuers to achieve more market-oriented and cost-effective financing.
DISADVANTAGES
Managing multiple bank relationships is no small feat. Each bank needs to come to an understanding
of the business and how its financial activities are conducted. A comfort level must be established on
both sides of the transaction, which requires time and effort. Negotiating a document with one bank
can take days. To negotiate documents with four to five banks separately is a time-consuming,
inefficient task. Staggered maturities must be monitored and orchestrated. Moreover, multiple lines
require an inter-creditor agreement among the banks, which takes additional time to negotiate.
Loans are structured with maintenance covenants
Loans have maintenance covenants, while bonds do not. Maintenance covenants require borrowers to MAINTAIN certain financial
ratios Debt/EBITDA ratio, Fixed Charge Coverage Ratio, Interest Coverage Ratio. Until last year, thanks to a hyperliquidmarket,
issuers were able to negotiate fewer covenants in their deals However, post sub prime market crisis, banks have tightened covenants.

CONCLUSION
One advantage of syndication loans is that this market allows the borrower to access from a diverse
group of financial institutions. In general, borrowers can raise funds more cheaply in the syndicated
loan market than by borrowing the same amount of money through a series of bilateral loans. This
cost saving increases as the amount required rises.
The increase in overseas borrowing and merger and acquisitions by Indian corporates in
2007 has been a tidy earning opportunity for Indian banks.
INDIAN TRANSACTIONS
A recent example has been the Rs. 1,300 crore loan syndication of Hutch done by ABN Amro, HSBC
and Standard Chartered for three years. The issue was underwritten by the three banks equally and
was thrown open for book building. It was pitched at a rate of 7.10%. However, on the back of
demand from banks, the interest rate was brought down to 7%. It was distributed among 10 banks.
Hindalco raised around Rs. 6,000 crores, which was lead-managed by IDBI Bank. The loan has
tenure of 10 years with a reset after five years. It was priced at 5-year G Sec plus 65 bps. Thirty banks
participated in the issue.
The largest syndication deal in the market currently is Reliance Ports at around Rs. 4,200 crores.
Also, Delhi-based DLF is looking at raising Rs. 1,000 crores for 10 years. In India, most corporates in
the market are looking at raising money for Greenfield projects.
The Housing Development Finance Corporation (HDFC) has signed a loan agreement for $200
million with International Finance Corporation (IFC), the private sector development arm of the
World Bank group. The loan would be available to HDFC in two tranche - the first part of $100
million to be lent directly by IFC as a multilateral tranche, and the second part as a syndicated
tranche, said a news release from the housing finance company. The first tranche has bullet maturity
at the end of 8 years, the rate of interest being six-month LIBOR plus 100 basis points. The second
tranche would be syndicated by IFC and would be placed with leading international banks.
The main objective of the loan was broad-basing the medium-to-long-term funding sources for HDFC
and also to reduce the overall cost of funding. The proceeds of the loan will be utilized for lending to
individuals across the country for residential housing. HDFC is in the process of finalising suitable
risk management arrangements to hedge against foreign exchange fluctuations.
RECENT UPDATES
Indian Markets
In 2007, State Bank of India jumped to the number one spot in the league table, in terms of
fees earned from loan syndication in the Asia Pacific region (excluding Japan and Australia),
according to Thompson Financial Freeman data.
SBI was ranked fifth in 2006. ICICI Bank moved to the fourth position in 2007 from 24th in
2006.
SBI, India largest commercial bank, earned $35 million from fees. ICICI Bank made about
$12 million. The total fee earned by league table banks in this region was $290.6 million in
2007.
Both SBI and ICICI Bank have witnessed an improvement in their market share as well.
SBI's market share improved from 4.3% in 2006 to 12% in 2007, while that of ICICI Bank
rose from 1.3% to 4.1% in the same period. SBI handled 64 issues and ICICI Bank
managed 28 issues in 2007.
The focus on syndication fees is aimed at increasing the non-interest income. The pricing
hinges on global factors and is market-driven and hence there are no domestic
considerations, even if the client happens to be an Indian company, a senior SBI executive
said.
With loan proceeds of $41.8 billion from 122 transactions, the Indian borrowers dominated
the region's syndicated loan market in 2007, capturing a market share of 24.1%.
This year marked the first time that Indian companies were more active in the regional loan
market than their Hong Kong and Taiwanese counterparts.
Global Markets
The Asian (ex-Japan, ex-Australia) loan volumes reached record levels this year, with $197.4 billion
raised from 769 issues. This represented an increase of 22.5% from $161.1 billion garnered in 2006.
Global syndicated lending reached $4.5 trillion in 2007 from $4 trillion in 2006, representing an
increase of 13.4%, despite credit concerns in the second half of 2007.
Source: www.loanpricng.com
Global lending plummets 37% to $526B in 1Q08
Americas and EMEA plunge by 51% and 44%, respectively
Asia-Pacific and Japan climb by 21% and 45%, respectively
OUTLOOK 2008
Default Rates would be on the Rise in 2008
Given the record low default rates of 2007, combined with softening economic
fundamentals, it is no surprise that default rates are on the rise in 2008. Market participants
anticipated default rates to 4.5% - 5.0% context, given softer than expected economic
conditions and weak financial performance from borrowers in highly cyclical industries