syndicated loan


  • Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, who, in turn, determine many of the standards and practices of loan

  • Since the 1998 Russian financial crisis roiled the market, however, arrangers have adopted market-flex contractual language, which allows them to change the pricing of the
    loan based on investor demand — in some cases within a predetermined range — and to shift amounts between various tranches of a loan.

  • Institutional investors in the loan market are principally structured vehicles known as collateralized loan obligations (CLO) and loan participation mutual funds (known as
    “prime funds” because they were originally pitched to investors as a money-market-like fund that would approximate the prime rate) also play a large role.

  • Most new acquisition-related loans are kicked off at a bank meeting at which potential lenders hear management and the sponsor group (if there is one) describe what the terms
    of the loan are and what transaction it backs.

  • Participants[edit] Within the banking sector, the role of setting up syndicated loans differ from deal to deal but generally a handful of key actors are consistent.

  • This version will be stripped of all confidential material such as management financial projections so that it can be viewed by accounts that operate on the public side of
    the wall or that want to preserve their ability to buy bonds or stock or other public securities of the particular issuer (see the Public Versus Private section below).

  • [8] Syndication is generally initiated by the grant of a mandate by the borrower to the arranging bank(s) or ‘lead managers’ setting out the financial terms of the proposed

  • The agent bank’s express duty, is to provide information designed to enable lenders to consider how to exercise their right under various facility agreements in relation to
    accelerating the debt, not to assist with ‘exit’ or liability for misstatements.

  • Scheme of arrangement require majority in number (head-count test) whereas if bonds are issued on a global note there is only one true creditor with sub participation through

  • The difference between the two is that a novation cancels old loans completely (which might have adverse effects on any security for the loan unless held by a trustee for
    the banks) whereas an assignment and assumption preserves the old loans and their security.

  • These investors often seek asset-based loans that carry wide spreads and that often feature time-intensive collateral monitoring.

  • In case of loans, majority lenders typically defined as 50% or 75% of value based on commitments.

  • For leveraged loans, considered non-investment grade risk, U.S. and European banks typically provide the revolving credits, letters of credit (L/Cs), and — although they are
    becoming increasingly less common — fully amortizing term loans known as “Term Loan A” under a syndicated loan agreement while institutions provide the partially amortizing term loans known a “Term Loan B”.

  • However, since the late 1990s, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.

  • This makes taking security easier, since there is a single chargee which is unlikely to change through the duration of the loan (through the secondary market).

  • The financial terms are set out in a “term sheet” which states the amount, term of the loan, repayment schedule, interest margin, fees any special terms, and a general statement
    that the loan will contain representations and warranties.

  • The essence of syndication is that two or more banks agree to make loans to a borrower on common terms governed by a single agreement.

  • This might include terms which relate to when the loan is to finance a company acquisition or a large infrastructure project, conferring interests in the lenders.

  • Transfer provisions in syndicated loan agreement set up procedures under which all the parties to the loan agreement agree that if a lender and a transferee (i) agree upon
    a transfer of all or part of the lender’s interest (ii) record the agreement but not the price or other ancillary matters which are to be dealt with separately and (iii) deliver this to the agent bank, the transfer will take effect.

  • Transfer: Minority lenders who feel oppressed may choose to transfer their debts to other, although conflict might limit amount of willing buyers to reduce price of the loan/bonds

  • If the loan is undersubscribed, the credit may not close — or may need significant adjustments to its interest rate or credit rating to clear the market.

  • The banks will outline their syndication strategy and qualifications, as well as their view on the way the loan will price in market.

  • Syndicated credits generally contain a provision whereby a bank may novate its rights and obligations to another bank.

  • The object of the novation is to ensure a transfer of obligations of the bank to lend; without this transfer releasing the original bank, the original bank may have a continuing
    credit exposure to the transferee bank if the transferee bank fails to make a new loan to the borrower when required by the loan agreement and this exposure may attract a capital adequacy requirement.

  • In addition, in Europe, mezzanine funds play a significant role in the loan market.

  • Novation may amount to a complete substitution of the new bank or rather as an assignment of the rights of the old bank and the assumption by the new bank of obligations under
    the loan agreement plus the release of the old bank.

  • At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital.

  • The syndicated loan market is the dominant way for large corporations in the U.S. and Europe to receive loans from banks and other institutional financial capital providers.

  • [4] Correspondingly, three key actors operate within a syndicated lending:[5] • Arranger • Agent • Trustee These actors utilise two core legal concepts to overcome the difficulty
    of large-cap lending, those being Agency and Trusts.

  • Although U.S. prime funds do make allocations to the European loan market, there is no European version of prime funds because European regulatory bodies, such as the Financial
    Services Authority (FSA) in the U.K., have not approved loans for retail investors.

  • The syndication process As a syndicated loan is a collection of bilateral loans between a borrower and several banks, the structure of the transaction is to isolate each bank’s
    interest whilst maximising the collective efficiency of monitoring and enforcement of a single lender.

  • There are also market-value CLOs that are less leveraged — typically three to five times — and allow managers more flexibility than more tightly structured arbitrage deals.

  • However, when second lien entered the market, it eroded the mezzanine market; consequently, mezzanine funds expanded their investment universe and began to commit to second
    lien as well as payment-in-kind (PIK) portions of transaction.

  • The essence is to make loans on similar terms to make a bundle of loans into a single agreement.

  • Of course, with flex-language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

  • In Europe, the banking segment is almost exclusively made up of commercial banks, while in the U.S. it is much more diverse and can involve commercial and investments banks,
    business development corporations or finance companies, and institutional investors such as asset managers, insurance companies and loan mutual funds and loan ETFs.

  • Therefore, in last years exam, the subordinated nature of the second lender meant that there was a different class and the first group could call the debt without consequence
    of the second group being hesitant.

  • Best-efforts syndication[edit] A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving
    the credit to the vicissitudes of the market.

  • [6] The distinction in the lending agreements, and use of the three aforementioned actors is primarily to avoid the creation of a partnership, avoid lenders from inadvertently
    acting as guarantors to one another — or to prevent Set-off.

  • They provide funding to corporations undergoing restructurings, including bankruptcy, in the form of super senior loans also known as debtor in possession (DIP) loans.

  • To fuel this growing market, a broader array of banks from multiple regions now fund these deals, along with European institutional investors and U.S. institutional investors,
    resulting in the creation of a loan market that crosses the Atlantic.

  • A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known
    as lead arrangers.

  • In addition, investors will be briefed regarding the multiple exit strategies, including second ways out via asset sales.

  • As a result, the most profitable loans are those to leveraged borrowers — issuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins
    above the relevant LIBOR in the U.S. and UK, Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors.

  • Finance companies have consistently represented less than 10% of the leveraged loan market, and tend to play in smaller deals — $25–200 million.

  • Tragedy of the Commons[edit] Hardin writes that Individual management and enforcement of the loans/bond increases individual monitoring costs, enforcement costs and facilities
    wealth destruction due to premature acceleration of loan/bond and enforcement of security.

  • On the arrangers’ side, the players are determined by how well they can access capital in the market and bring in lenders.

  • They are generally lightly levered (two or three times), allow managers significant freedom in picking and choosing investments, and are subject to being marked to market.

  • To overcome the head-count test issues in bonds: bondholders can be given definite notes (although costly) or on the basis of this right be perceived as contingent-creditors.

  • (If it is a small deal or a refinancing instead of a formal meeting, there may be a series of calls or one-on-one meetings with potential investors.)

  • Before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit.

  • These are typically large revolving credits that back commercial paper or are used for general corporate purposes or, in some cases, acquisitions.

  • Implied term: It is an implied term in loan and bond agreements that the majority must act in good faith and for the purpose of benefiting the class as a whole.

  • In jurisdictions where the trust is not recognised, it is often addressed by parallel debt provisions stating that the amount outstanding is deemed to be owing to the security
    trustee but will be reduced by any amounts actually received by the syndicate members.

  • Lending Terms[edit] There are several common types of lending terms, including implied terms in syndicated lending that affect the operation and coordination of lending behaviour.

  • If the loans were undersubscribed, the arrangers could very well be left above their desired hold level.

  • In the U.S. and in Europe, once the loan is closed, the final terms are then documented in detailed credit and security agreements.

  • As a result, in Europe, more and more leveraged buyouts have occurred over the past decade and, more significantly, they have grown in size as arrangers have been able to
    raise bigger pools of capital to support larger, multi-national transactions.

  • The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.

  • On the lenders’ side, it is about getting access to as many deals as possible.

  • This is found within a ‘pro-rata sharing clause’ by forcing individual lenders to share individual recoveries which reduces incentive to cut-the-line behaviour.

  • It has been suggested that the historical cooperation within the London loan market helped produce efficiency insolvency work-outs through the London Approach.

  • CLOs are usually rated by two of the three major ratings agencies and impose a series of covenant tests on collateral managers, including minimum rating, industry diversification,
    and maximum default basket.

  • Since the Eurozone was formed in 1998, the growth of the European leveraged loan market has been fuelled by the efficiency provided by this single currency as well as an overall
    growth in merger & acquisition (M&A) activity, particularly leveraged buyouts due to private equity activity.

  • In Europe, although institutional investors have increased their market presence over the past decade, banks remain a key part of the market.

  • It may also be liable if it fails to do its best endeavours to acquire lending parties, these vary depending on the law of representation and fiduciary duty within national

  • In Europe, where mezzanine capital funding is a market standard, issuers may choose to pursue a dual track approach to syndication whereby the MLAs handle the senior debt
    and a specialist mezzanine fund oversees placement of the subordinated mezzanine position.

  • [11] Conflict between Lenders[edit] There are four potential causes of conflicts between lenders: Co-ordination[edit] Decision making requires coordination.

  • Management will provide its vision for the transaction and, most importantly, tell why and how the lenders will be repaid on or ahead of schedule.

  • In Europe, over the past few years, other vehicles such as credit funds have begun to appear on the market.

  • Management and enforcement is in principle vested in a single individual in order to reduce monitoring costs and value distraction.


Works Cited

[‘Taylor, Alison; Sansone, Alicia (2007). The Handbook of Loan Syndications & Trading. New York: McGraw-Hill. ISBN 978-0-07-146898-5.
2. ^ Caouette, John B.; Altman, Edward I. (1998). Managing Credit Risk. New York: Wiley. p. 19. ISBN 0-471-11189-9.
3. ^
“8 Unusual Ways Businesses Can Borrow Money”. Investopedia. Retrieved 1 December 2022.
4. ^ Mugasha ‘The Law of Multi-bank Financing’ Chapters 1 and 3, (2007) OUP
5. ^ Capital, B. A. M. (13 June 2022). “Structure of Multifamily Syndication Investing”.
BAM Capital. Retrieved 1 December 2022.
6. ^ African Export-Import Bank v Shebah Exploration (2017)
7. ^ Sempra Meals Ltd v IRC [2008] 1 AC 561, [74]-[100]
8. ^ Sumitomo Bank Ltd v Bankque Bruxelles Lambert SA [1997] 1 Lloyds Rep 487; IFE Funds
SA v Goldman Sachs International [2007] EWCA Civ 811; cf the extensive liability in Australian NatWest Australia Bank Ltd v Tricontinental Corp Ltd [1993] ATPR (Digest)
9. ^ Mugasha ‘The Law of Multi-bank Financing’ Chapter 3, (2007) OUP
10. ^
Mugasha ‘The Law of Multi-bank Financing’ Chapter 1, 40 (2007) OUP
11. ^ Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) [2010] EWCA Civ 1335
12. ^ Redwood Master Fund Ltd v TD Bank Europe Ltd
13. ^ Fabozzi, Frank (1999). High-Yield
Bonds. New York: McGraw-Hill. p. 43. ISBN 0-07-006786-4.
14. ^ Agencies announce Shared National Credit definition change
2. Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, Chapter 6 Loan Syndication Agreements, ISBN
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