WHAT IS LOAN SYNDICATION?

Loan syndication is the process of involving a group of lenders in funding various portions of a
loan for a single borrower. Loan syndication most often occurs when a borrower requires an
amount too large for a single lender to provide or when the loan is outside the scope of a lender's
risk-exposure levels. Thus, multiple lenders form a syndicate to provide the borrower with the
requested capital.
The agreements between lending parties and loan recipient often need to be managed by a
corporate risk manager to reduce misunderstandings and to enforce contractual obligations. The
primary lender conducts most of this due diligence, but lax oversight can increase corporate
costs. Company legal counsel may also be engaged to enforce loan covenants and lender
obligations.
A syndicated loan, also known as a syndicated bank facility, is financing offered by a group of
lenders referred to as a syndicate who work together to provide funds for a single borrower. The
borrower can be a corporation, a large project, or a sovereign government. The loan can involve
a fixed amount of funds, a credit line, or a combination of the two.
Syndicated loans arise when a project requires too large a loan for a single lender or when a
project needs a specialized lender with expertise in a specific asset class. Syndicating the loan
allows lenders to spread risk and take part in financial opportunities that may be too large for
their individual capital base. Interest rates on this type of loan can be fixed or floating, based on
a benchmark rate such as the London Interbank Offered Rate (LIBOR). LIBOR is an average of
the interest rates that major global banks borrow from each other.

HOW LOAN SYNDICATION IS USED IN CORPORATE FINANCING

Loan syndication is often used in corporate financing. Firms seek corporate loans for a variety of
business reasons that include funding for mergers, acquisitions, buyouts, and other capital
expenditure projects. These types of capital projects often require large amounts of capital that
typically exceed a single lender's resource or underwriting capacity.
Loan syndication allows any one lender to provide a large loan while maintaining a more prudent
and manageable credit exposure because the associated risks are shared with other lenders. Each
lender's liability is limited to their respective share of the loan interest. Generally speaking, with
the exception of collateral requirements, most terms are uniform among lenders. Collateral
assignments are generally assigned to different assets of the borrower for each lender. Usually,
there is only one loan agreement for the entire syndicate.
Financial Institution Coordinates Loan Syndication
For most loan syndications, a lead financial institution is used to coordinate the transaction. The
lead financial institution is often known as the syndicate agent. This agent is also often
responsible for the initial transaction, fees, compliance reports, and repayments throughout the
duration of the loan, loan monitoring and overall reporting for all lending parties.
A third party or additional specialists may be used throughout various points of the loan
syndication or repayment process to assist with various aspects of reporting and monitoring.
Loan syndications often require high fees because of the vast reporting and coordination required
to complete and maintain the loan processing. Fees can be as high as 10% of the loan principal.
The Loan Syndications and Trading Association (LSTA) is an established organization within
the corporate loan market that seeks to provide resources on loan syndications. It helps to bring

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together loan market participants, provides market research, and is active in influencing
compliance procedures and industry regulations.

HOW A SYNDICATED LOAN WORKS

In cases of syndicated loans, there is typically a lead bank or underwriter, known as the arranger,
the agent, or the lead lender. The lead bank may put up a proportionally bigger share of the loan,
or it may perform duties such as dispersing cash flows among the other syndicate members and
administrative tasks.
The main goal of syndicated lending is to spread the risk of a borrower default across multiple
lenders or banks, or institutional investors, such as pension funds and hedge funds. Because
syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower
defaulting could cripple a single lender. Syndicated loans are also used in the leveraged buyout
community to fund large corporate takeovers with primarily debt funding.

KEY TAKEAWAYS

 A syndicated loan, or a syndicated bank facility, is financing offered by a group of

lenders called a syndicate who work together to provide funds for a borrower.
 The borrower can be a corporation, a large project, or a sovereign government.
 Because they involve such large sums, syndicated loans are spread out among several
financial institutions to mitigate the risk in case the borrower defaults.
 Syndicated loans can be made on a best-efforts basis, which means that if enough
investors can't be found, the amount the borrower receives is lower than originally
anticipated. These loans can also be split into dual tranches for banks that fund standard
revolving credit lines and institutional investors that fund fixed-rate term loans.
 Because they involve such large sums, syndicated loans are spread out among several
financial institutions, which mitigate the risk in case the borrower defaults.

EXAMPLE OF A SYNDICATED LOAN

 Syndicated loans are usually too large for a single lender to handle. For example, the
Chinese corporation Tencent Holdings Ltd., the biggest internet company in Asia and
owner of popular messaging services WeChat and QQ, signed a syndicated loan deal on
March 24, 2017, to raise $4.65 billion. The loan deal included commitments from a dozen
banks with Citigroup Inc. acting as the coordinator, mandated lead arranger, and book
runner, which is the lead underwriter in a new debt offering that handles the "books."
 Previously, Tencent had increased the size of another syndicated loan to $4.4 billion on
June 6, 2016. That loan, used to fund company acquisitions, was underwritten by five
large institutions: Citigroup Inc., Australia and New Zealand Banking Group, Bank of
China, HSBC Holdings PLC, and Mizuho Financial Group Inc. The five organizations
together created a syndicated loan that encompassed a five-year facility split between
a term loan and a revolver. A revolver is a revolving credit line, meaning the borrower
can pay down the balance and borrow again.