Loan syndication started when the size of individual loans grew bigger. This made banks deem it fit to allow other lenders to partake in the risks. Basically, a group of lenders will finance any individual who needs a considerable amount of loan. This group of lenders comes together to form a ‘syndicate’. A syndicate is a term that describes any group that comes together to conduct a business. Hence, the term ‘loan syndication’ came into existence. Here’s an overview of everything you need to know about loan syndication.
What is loan syndication?
Loan syndication is the process whereby various lenders unite to finance various portions of a loan for a borrower. Usually, it occurs when a borrower needs an amount too big for one lender to provide. This makes it necessary for various lenders to unite and form a syndicate.
Basically, lenders opt for a loan syndication process when a borrower requires huge capital for business reasons. These reasons could either be for mergers, project financing, or buyouts. Each lender’s right depends on how much they contribute to the total loan amount.
As the borrower, you can estimate the sum to repay using a loan calculator.
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What are the processes of loan syndication?
The borrower initiates the loan syndication process with an invitation for bids. The process starts by listing out the loan requirements, terms, currency as well as tenor. Thereafter, they mandate a bank or financial institution to take the loan syndication responsibility. This bank will act as a manager on behalf of others members of the syndicate. Additionally, they check the financial history of other stakeholders before starting the syndication process. Below are the three stages of the loan syndication process:
1. The pre-mandate stage
The prospective borrower starts this stage. The borrower starts by contacting a single bank or requesting competitive bids from various banks. Thereafter, the borrower selects and mandates a lead bank to take charge of the syndication process. The lead bank will then commence the appraisal process. The appraisal process involves identifying the borrower’s needs, designing a loan structure, and developing a credit proposal.
2. Placing the loan and Disbursement stage
This stage involves the lead bank selling the loan to prospective banks in the marketplace. Basically, this means that the lead bank prepares a document called Information Memorandum. This document contains the transaction terms, executive summary, investment consideration, financial structure, and risk mitigation. After this, they prepare legal documentation and invite selected banks to form the syndicate. If prospective lenders raise any concern, the lead banks negotiate it with the borrower. Once the members of the syndicate are complete, they sign a confidentiality agreement. Thereafter, the syndicate discusses the loan in phases as written in the contract.
Usually, the loan is put into a ‘no-lien’ account. A no-lien account is an account created solely to disburse loans. The bank closely monitors the activity of this account including withdrawals. This is to ensure that the borrower uses the funds only for their intended purpose.
3. The post closure stage
This stage involves monitoring. It is mainly done through an Escrow account. An escrow account is an account that is created for the borrower to deposit its revenue. An agent prioritizes the repayment of loans first before payment to any third party. Also, the agent is responsible for handling the operations of the loan facility daily.
Basically, these three stages sum up the process of loan syndication
Bottom line
Loan syndication is a process put in place majorly to finance huge borrowings of capital-intensive projects. Also, it saves the borrower’s time and effort. This is because the lead bank does the major work. Once the borrower selects a lead bank, they oversee the complete syndication process.
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