Syndicated loans are loans made by two or more lenders and administered by a common agent using similar terms and conditions and common documentation. According to Business Credit, most loan syndications take the form of a direct-lender relationship, in which the lead lender is the agent for the other lenders in the origination and administration of the loan, and the other lending banks are signatories to the loan agreement. In the last several years the popularity of this type of loan has exploded. By 2000, the total annual volume of syndicated loan issuance had risen to $1.2 trillion, a $100 billion increase over the year before. The businesses that are choosing this option to finance their growth have expanded beyond the Fortune 500 companies that were its first users. Initially developed to address the needs of huge, acquisition-hungry companies, they have now become a flexible funding source for both mid-sized companies and smaller companies that are on the cusp of moving into mid-sized status. In fact, syndicated loans for as little as $10 million have become commonplace.
Most successful small companies that have evolved to the point where they are straining at the boundaries of that "small" designation have always dealt with one or a few individual banks, negotiating individual loans and lines of credit separately with each institution. The next financing step, however, may be to consolidate banking activity through one syndicated facility. Corporate Cashflow Magazine' s Thomas Bunn noted that while business owners and executives are sometimes loathe to run the risk of alienating banks with which they have long done business, the simple reality is that "companies can outgrow their traditional banks and need new capabilities or an expanded bank group to fund their continued growth."
Of course, businesses can always choose to simply increase their stable of lending institutions, but this has several drawbacks. "Managing multiple bank relationships is no small feat," said Michael Fidler and Patricia Neumeyer in Business Credit. "Each bank needs to come to an understanding of your 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 cantake 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."
Given these obstacles, business owners and executives often express interest in syndicated loans, which offer consolidation of effort and the possibility of making new banking contacts. Lenders support their use as well. "Lenders like syndications because they permit them to make more loans, while limiting individual exposures and spreading their risk within portfolios more widely," explained Fidler and Neymeyer. "Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants."
Syndicated loans hinge on the creation of an alliance of smaller banking institutions who, by joining forces, are able to meet the credit needs of the borrower. This creation is spurred by selection of an agent who manages the account. "In consultation with the borrower, the arranger will assemble a group of banks to form a syndicate, with each bank lending portions of the required amount," explained John Tsui in Lodging Hospitality. "The loan normally is signed six to eight weeks after the mandate has been awarded, and after signing, the borrower can draw down funds."
Borrowers taking out syndicated loans pay upfront fees and annual charges to the participating banks, with interest accruing (on a quarterly, monthly, or semiannual basis) from the initial draw-down date. "One advantage of syndication loans is that this market allows the borrower to access from a diverse group of financial institutions," said Tsui. "In general, borrowers can raise funds more cheaply in the syndicated loan market than they can borrowing the same amount of money through a series of bilateral loans. This cost saving increases as the amount required rises."
In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:
A borrower's ability to secure a syndicated loan, though, is predicated on its ability to spur the creation of a syndicate in the first place. "No two syndications are identical," wrote Bunn. "The market changes every day. Many intangibles influence the structure and pricing of a credit, including the experience and depth of a company's management team; trends in the industry and market; and financial trends within a company."
The first thing the company has to do is select an agent to facilitate communications and transactions between the borrower and the banking institutions that will form the syndicate. "The first place to look for an agent is among your existing relationships," said Fidler and Neumeyer. "Certainly you will want a bank that has the necessary syndication capability and experience to obtain market credibility. Although the agent need not always be the largest participant in the syndication, the agent should have sufficient capital strength to be the anchor for the credit. Most important, however, is that you are comfortable with the bank. Because the agent is acting on your behalf, they must fully understand your business and share your attitudes and priorities."
Once an agent has been selected, the process of finding willing banks is undertaken. This phase of the process can vary considerably in terms of complexity. Some agents gauge the interest level of other lenders by simply sending them necessary financial information on the borrower and the intended shape and size of the syndicate group, as well as data on borrower operations, background, management, and marketing. Bunn noted that in other cases, however, this process can be more complex, involving extensive due diligence, the preparation of a complete syndication offering memorandum (including financial projections), and a formal bank presentation.
By and large, the length of time necessary to form a bank group is roughly equivalent to the complexity of the proposed deal. Creation of a syndicate can take place over the course of a few weeks or a few months. Analysts note, however, that the length of time necessary to conclude the deal is usually less if the banks are already familiar with the borrower's operations. Once the membership of the group has been determined, the relationship quickly assumes the character that the borrowing business would expect when dealing with a single lending institution. "This is not to say that the borrower relinquishes control over the process and the participants will still actively call on the borrower," noted Fidler and Neumeyer. "It is merely the interaction between the participating banks that should diminish—to your benefit. The agent should educate you about the market and help you navigate the specifics of pricing and structuring the transaction."
Indeed, the agent's responsibilities are many and varied. The agent is charged with administering the syndicated facility itself, as well as all borrowings, repayments, interest settlements, and fee payments. A chief component of the administration function is to make sure that communications between the lending institutions and the borrower remain open so that both sides remain informed about changing business and market realities. In return for providing these services, the agent is compensated with an annual fee.
Bunn, Thomas. "What Borrowers Need to Know About Loan Syndication." Corporate Cashflow Magazine. October 1995.
Fidler, Michael, and Patricia Neumeyer. "Vindication of Syndication—Why Borrowers Should Consider Agented Transactions." Business Credit. May 1996.
"Syndicated Loans." Wall Street Journal. November 22, 2000.
Tsui, John F. "The Appeal of Syndicated Loans." Lodging Hospitality. February 1992.
Wienke, Robert O. "Loan Syndications and Participations: Trends and Tactics." Commercial Lending Review. Spring 1994.