Loan Syndication Services generally involves two or more banks, which work collectively to provide credit to a large borrower. Loan syndication happens when a single borrower demands a large loan ($1 million or more) that a single lender may be incapable to provide. 

When the loan is outside the range of the lender’s risk exposure. Lenders then form a syndicate that allows them to spread the risk and share in the financial opportunity. Be it a working capital loan, term loan, loan against property, or bank guarantee. The banks function as a syndicate and use common debt documents to provide loans to businesses. 

The liability of each lender is restricted to their share of the total loan, and they all share in the lending risk. The agreement for all members of the syndicate is included in one loan agreement. One of the lenders acts as the manager (arranging bank), which administers the loan on behalf of the other lenders in the syndicate. The syndicate may be a combination of various types of loans, each with different repayment terms that are agreed upon during negotiations between the lenders and the borrower.

Features of Loan Syndication Services
  • Large Amount.
  • No separate agreement between an individual bank and the borrower.
  • No ambiguity
  • The Length of the agreement is generally between 3 to 15 years.
  • Low risk
  • Each bank is not necessarily to contribute an equal amount
Participants in a Syndicated Loan

Those who participate in loan syndication may vary from one deal to another, below are the typical participants include the following:

1. Lead Bank or Arranging Bank

The lead bank acts as a manager and is responsible for a borrower organising funding based on the decision by the parties of the loan. The bank must procure other lending parties who are willing to participate in the lending syndicate and share the lending risks involved. The arranging bank and the borrower negotiate the financial terms outlined in the term sheet.

2. UnderWriting Bank

The lead bank may underwrite the unsubscribed portions of the required loan or a different bank may also underwrite the loan. Underwriting banks will take the risk that will likely occur.

3. Participating Bank

All banks that participate in loan syndication are known as participating banks. Participating banks will charge fees for their participation.

4. Agent Bank

The work of the agent bank is to guarantee that loan syndication is operating effectively. The agent bank acts as a mediator between the borrower and lender and also has a contractual obligation for both parties. However, the agent lacks a fiduciary duty and does not need to advise the borrower or the lenders. The agent’s duty is mainly administrative.

5. Trustee

The trustee is responsible for retaining the security of the assets of the borrower on behalf of the lenders. Syndicated loan structures avoid granting the security to the individual lenders separately since the practice would be costly to the syndicate. In the event of default, the trustee is responsible for enforcing the security under instructions by the lenders. Therefore, the trustee only has a fiduciary duty to the lenders in the syndicate.

Advantages of a Syndicated Loan

1. Financing takes less time and effort.

2. The administration of the loan is Extremely Efficient.

3. It is beneficial for borrowers to establish a good market image.

4. Borrowers have flexibility in structure and pricing.

5. Allows borrowers to borrow large amounts to finance

6. The borrower need not go to each bank and also need not apply separate applications to all of the banks.

7. The purpose and period of the loan are fixed.

8. The system is simple.

Process of Loan Syndication Services

Here is the process of loan syndication.

1. Initial discussions with promoters should be there.

2. Then, Project Assessment needs to be done.

3. Availability of alternatives for Sources of funds needs to be done.

4. Then, a Preliminary discussion with lenders should be done.

5. Then there is a requirement to prepare of loan application and follow up on it.

6. Assisting in Project Appraisal by doing financial analysis.

7. Lastly, the Letter of Credit should be obtained from a lending institution

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