Loan syndication services often include two or more banks working together to give loans to a large borrower. Loan syndication occurs when a single borrower requests a large loan ($1 million or more), which a single lender may be unable to fulfill.

When the loan is outside of the lender’s risk tolerance. Lenders then create a syndicate to spread risk and share the cash potential. It could be a working capital loan, a term loan, a loan against property, or a bank guarantee. Banks work together as a syndicate to issue loans to businesses using common debt agreements.

Each lender’s liability is limited to their part of the overall loan, and they all bear the lending risk. The agreement for all syndicate participants is included in a single loan agreement. One of the lenders serves as the manager (arranging bank), and it manages the loan on behalf of the other lenders in the syndicate. The syndicate may consist of a variety of loans, each with its own set of repayment terms negotiated between the lenders and the borrower.

Features of Loan Syndication Services:

• A large amount.
• There is no separate agreement between the individual bank and the borrower.
• No ambiguity.
• The arrangement typically lasts between three and fifteen years.
• Low risk.
• Each bank does not have to provide an equal amount.

Participants in a Syndicated Loan

Those who participate in loan syndication may vary from deal to deal; nevertheless, the common participants include the following:

1. Lead or Arranging Bank

The lead bank serves as a manager and is in charge of arranging money for a borrower in accordance with the loan parties’ decision. The bank must find additional lending parties willing to engage in the lending syndicate and share the lending risks involved. The arranging bank and the borrower discuss the financial terms specified in the term sheet.

2. Underwriting Bank

The unsubscribed components of the needed loan may be underwritten by the lead bank, or by another bank. Underwriting banks will accept the risk that is expected to arise.

3. Participating Bank

All banks that participate in loan syndication are referred to as participants. Participating banks will pay fees for their involvement.

4. Agent Bank

The agent bank’s role is to ensure that loan syndication is running successfully. The agent bank serves as a liaison between the borrower and the lender, and it also has a contractual obligation to both parties. However, the agent has no fiduciary duty and is not required to advise the borrower or lenders. The agent’s duties are primarily administrative.

5. Trustee

The trustee is in charge of retaining security for the borrower’s assets on behalf of the lender. Syndicated loan structures prevent issuing security to individual lenders separately because this would be costly for the syndicate. In the event of default, the trustee is responsible for enforcing the security as instructed by the lenders. As a result, the trustee’s fiduciary duties are limited to the syndicate’s lenders.

Advantages of Syndicated Loans

1. Financing requires less time and effort.

2. The loan is administered quite efficiently.

3. It is advantageous for borrowers to project a positive market image.

4. Borrowers have options for structure and pricing.

5. Allows borrowers to borrow big amounts for financing.

6. The borrower does not need to visit each bank or submit individual applications to each bank.

7. The purpose and duration of the loan are predetermined.

8. The system is straightforward.

Process for Loan Syndication Services

Here’s how loan syndication works.

1. Initial discussions with promoters should occur.

2. Then, Project Assessment must be completed.

3. Alternative sources of funding must be identified.

4. Then, a preliminary discussion with lenders should be conducted.

5. Then there is the need to draft a loan application and follow up on it.

6. Assisting with project appraisal by doing financial analyses.

7. Finally, obtain the Letter of Credit from a lending institution.