U. S.

Loan Syndications

Chris Droussiotis
Spring 2010

Table of Contents
1.

Loan Syndication Background & History

2.

Syndication Loan Market Overview Types of Loan Syndications Formats

3.

Loan Syndication Process including a summary of Internal Rating Analysis

4.

Typical Leverage Loan Structure

5.

Typical Leverage Loan Term Sheet / Credit Agreement

6.

Example of Large Syndication

7.

Lecturers Biography

Loan Syndication Background & History

A syndicated loan is one that is provided by a group of lenders and is structured,
arranged, and administered by one or several commercial or investment banks known as
Arrangers.
Arrangers serve the investment-banking role of raising investor dollars for an issuer in need
of capital.
The issuer pays the Arranger a fee for this service, and this fee increases with the
complexity and risk factors of the loan.
In the Mid-1980s when the larger buyouts needed bank financing, the syndicated loan
market became the dominant way for issuers to tap banks and other institutional capital
providers for loans.
In the late 90s to early 2000s hundreds of Collateral Loan Obligation funds (CLOs) were
created and joined the loan syndication process. These funds were referred to as non-bank
institutions or institutional investors. These institutional investors played a key role in the
exponential growth of the Mega LBO deals seen in 2005-2007.
By 2007, nearly 75% of the loans were provided by non-banks, versus less than 20% 10
years earlier.
The Fall of 2007 the end of liquidity in the U.S Syndication market Traditional Banks had
to step up in the months and years to follow the liquidity crisis The U.S Syndication market
3
completely changed.

Two Markets Served

Investment Grade Loan Market

Leveraged Loan Market

Rated BBB- and Higher (Corporate)

Rated BB+ and Lower (Corporate)

Arrangers hold Higher Exposure ($200 million +)

Arrangers hold Lower Exposure

thus the need to syndicate

The majority of the Syndicate are traditional banks

The majority of the Syndicate are

non-banks (Financial institutions)

Two Markets Served

Investment Grade Loan Market

Leveraged Loan Market

$715 Billion

$229 Billion

$692 Billion

$245 Billion

Loan Syndication Market Overview

(Continued)

Exponential Demand Surge of Syndicated Leveraged Loans Vs Bonds

Loan Syndication Market Overview (Continued)

The Exponential Surge in Supply of Syndicated Loans was driven by
large Leveraged Buyouts starting in 2005 thru the summer of 2007
$37.9

$33.0
Hi Yield $11.25

$28.4

Hi Yield $11.3

$22.3
Hi Yield $13.22
Other (CMBS)
$7.25

$11.3
Hi Yield $6.03

$8.0
Hi Yield $3.0
Leveraged Loan
$5.0

28 Mar 05

Leveraged Loan
$11.3

20 Nov 05

Leveraged Loan
$26.65

Leveraged Loan
$15.185

Leveraged Loan
$21.7

Leveraged Loan
$9.0

24 Jul 06

2 Oct 06

26 Feb 07

30 Jun 07

Source: LoanConnector

Extremely high liquidity in the market gave banks confidence

to underwrite larger and larger deals

Loan Syndication Market Overview (Continued)

Institutional Investors through June 2007 dominated the market
Loan Syndication Participants:

Source: Deutsche Bank

Over time, institutional investors have replaced banks as lenders with over 75% of demand
coming from institutional investors as of LTM 6/30/07

Loan Syndication Market Overview (Continued)

The Leverage Loan Syndication Supply and Demand Imbalance
After (2nd Half 2007(2)) As of 12/05/07

Before (LTM June 30, 2007(1))

($ in Billions)

$620

$620

$95 (15%)
$45 (

14.5%

$120 (19.3%)

(3)

$33 (
9

$95 (15%)

$50 (
1

$620

$50 (
$10 (

$310 (50%)

$350
$162
B (46
.3%)
Capit
(4)
Abso al Require
rb Ex
d
t
o
ce ss
Supp
ly
$50
Cross
-o

ver In
Distre vestor /
ss B
Op p o
rtunit uyer /
y Fu n
ds

.4%)

Hedg
e
4.3%
)

Fund
s

Othe
r

(3)

Bank
s
CLOs

(2)

(2)

D em a

Liqui
d
Colla ation /
teral
Calls

/ HY

14.3%
)

3.5%
)

$350

nd

Prima
ry
Issua
nc e ( 5 )
$ 300

Supp
ly

Investor Landscape has changed

Sources:
(1)

Standard & Poors Leveraged Lending Review 2Q07

(2)

Demand assumptions: Banks and Other at 35% consistent with LTM 6/30/07; CLO, Hedge Fund and New Capital amounts Wall Street estimates
Supply assumptions: Primary Issuance based on current estimated forward calendar; Liquidation / Collateral Calls amounts Wall Street estimates

(3)

Finance Companies, Insurance Companies, Prime Rate Funds

(4)

Standard & Poors LCD News 12/5/07

(5)

Grossed up for ordinary issuance

The Secondary Loan Market took a plunge as a result of

oversupply at the time of financial crisis.

New Issue Loans with LIBOR Floor,

higher Spread pricing and tighter
structures post 2007

10

Types of Loan Syndication Formats

Underwritten deal

Best-efforts syndication

Club deal

11

Types of Loan Syndication Formats (Continued)

Underwritten deal

Arrangers guarantee the entire commitment, then syndicate the loan to reduce their exposure.

If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference.

Reasons for Arrangers to underwrite:

Offering an underwritten loan can be a competitive tool to win mandates.

Underwritten loans usually require higher fees

New Terms:
Flex Language

Memorandum of Understanding (MOU)

Balancing between holding and syndicating exposure

For preferred customers, the banks tend to hold higher exposure justifying it by additional products
offered going forward (an important variable in the banks profitability calculations (RAROC), though
given the size of the facility, the banks are phased with the dilemma of successfully syndicating and12
holding their exposure.

Types of Loan Syndication Formats (Continued)

Best-efforts syndication

The Arranger commits to underwrite less than the entire amount of the loan.

If the loan is undersubscribed, the deal may not close unless the terms/pricing/structure are changed.

Best-efforts syndications were used for risky borrowers or for complex transactions.

As in the case of underwriting, for preferred customers, the banks tend to hold higher exposure
justifying it by additional products offered going forward (an important variable in the banks
profitability calculations (RAROC).

13

Types of Loan Syndication Formats (Continued)

Club deal

Pre-marketed to a group of issuers or equity sponsors relationship lenders.

Typically a smaller loan (usually $25 million to $200 million but as high as $500 million)

The arranger is generally a first among equals, and each lender gets a full cut of the fees.

For preferred customers, the banks tend to hold higher exposure justifying it by additional
products offered going forward (an important variable in the banks profitability calculations
(RAROC).

14

The Loan Syndication Process

Lead Arranger Bank

Issuer /Company

Administrative Agent

Bookrunner Bank #1

Bookrunner Bank #2

Bookrunner Bank #3

Syndication Agent

Documentation Agent

Documentation Agent

Co-Mgr

Co-Mgr

Co-Mgr

Co-Mgr

Co-Mgr

Co-Mgr

Bank #1

Bank #2

Bank #3

Bank #4

Bank #5

Bank #6

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

Bank or
Institution

First Tier

Second Tier

Retail Level

15

The Loan Syndication Process

(Continued)

The issuer or Company solicits bids from Arrangers.

Arrangers will outline their syndication strategy and their view on the way the loan will price in market.

Issuer gives the mandate to one or more Arrangers (Co-Arrangers)

The arranger will prepare an information memo (IM) describing the terms of the transactions.
The IM typically will include:
As part of the
Executive Summary
syndication process
Investment Considerations
we will discuss in
Summary of Terms and Conditions (Term Sheet)
detailed these two
Transaction Overview
Company
items following this
Management and Equity Sponsor Overview
page.
Industry Overview
Financial Model
Timing for commitments, closing, as well as fees on level of commitments

Bank meeting is scheduled at which potential lenders hear the management and the Investor group.
A deadline is given for the banks to send their commitment levels subject to final documentation
Each Bank analyzes the deals credit and assess the pricing (RORA). Each Issuer is assigned an internal rating.
The Arranger collects all commitments different amounts from each Bank
Allocations are given and Legal Documentation is sent for their final review.

If the Deal is Oversubscribed, the allocation of each bank will most likely be reduced
If the Deal is Undersubscribed, depending on the FLEX language, the pricing could be Flexed up.

After Review of Legal Documentation by each lender and signatures are sent, the Deal closes and funds.

16

The Loan Syndication Process

(Continued)

Typical Internal Analysis Process by each bank

Internal Application sent to their respected investment/credit committees. This application
includes the following:
Requested amount that is within the rating parameters for each bank
Recommended amounts by Tranche (Revolving Credit / Term Loans)
Term and Conditions of the Loans (includes pricing, structure and covenants)
Profitability (RORA and RAROC)
Syndication strategy
Transaction discussion including Source and Uses and Capital Structure
Company discussion including historical performance and outlook
Corporate Structure
Management Biographies / Equity Sponsor Profile
Collateral Analysis
Industry Analysis
Financial Analysis (Projections Model)
Internal Rating Analysis
This process will be
discussed following this
Internal Legal Review
page
KYC (know-your-customer) and Compliance Review

17

The Loan Syndication Process

(Continued)

Typical Internal Rating Analysis by each bank

Most banks internal ratings are in line with the Agencies external ratings, though the analysis is
done independently. This analysis is based on two approaches:
Quantitative Analysis
Qualitative Analysis

The Typical Scale is 1-10, 1 being

with very limited risk to default and
10 the issuer being in bankruptcy
with no chance of recovery

The Quantitative Analysis for establishing the Internal rating which measures the probability
of default is based on the following parameters (each component is weighted at a specific
level of importance):
Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA)
Capitalization Ratio the relationship between the bank debt and the rest of the capital
(Capital Leases, Bonds, Equity)
Coverage Ratio - Issuers Cash Flow covering its debt obligations (interest and principal
payments)
Variance of Projections based on the projections, the model typically assumes a certain
haircut (10-30%) to the managements projections and it tests its ability to pay its debt
obligations.
The Quantitative approach adjusts up or down based on industry characteristics (Recession
resistance, cyclical, or event driven).

The Qualitative Analysis is subjective based on each banks internal policy. The Analysis

would include strength of management, support from the equity sponsor, recovery analysis 17
(asset collateral) and outlook.

Typical Leverage Loan Structure (Rated by S&P as BB or lower)

Bank Debt Facilities (typically represented 30-35% of Total Capital):
Revolving Credit (Typically, Commercial Banks provide this facility)
Commitment Amount
Typical maturities of 5-6 years
Funded Versus Unfunded Amount
Funded Pricing and Unfunded Pricing (Commitment Fee)
Letters of Credit
Term Loans (typically, Non-Bank institutions provide this facility)
Funded Amount sometimes structured as Delayed Draw Down
Typical Maturities of 6-8 years

Public Bonds / Notes (typically represented 20-25% of Total Capital):

Typical maturities of 9-11 years
Unsecured Debt

Private Equity (typically represented 30-45% of Total Capital):

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Typical Leveraged Deal Term Sheet / Credit Agreement

1. Parties to the Credit Agreement:
Borrower
Holding Company
Guarantor / Parent and Subsidiaries Guarantee
Agent Banks
Administrative Agent
Collateral Agent
Syndication Agent
Documentation Agent
Law Firms representing the Borrower and Agent Banks

2. Description of the Transaction / Purpose of the Loan (s)

20

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

3. Money Terms:

Amount / Tranches

Revolving Credit

Term Loans

Pricing

Interest Rate / Margin over LIBOR

Commitment Fees on unfunded portion

Maturities

Amortization Schedule (set principal payments)

Need 100% Vote from the syndicate

banks to amend these terms

21

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

4. Non-Money Terms:
Financial Covenants

Negative Covenants

Need Majority Vote (typical 51%) from the

syndicate banks to amend these terms

Affirmative Covenants

22

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

New Terminology in 2006 and 2007:

Typical Financial Covenants

Covenant Lite Structures (Covy lite)

Maximum Leverage Ratio (Total Debt / EBITDA)

Incurrence Tests Vs Maintenance Tests

Maximum Senior Leverage Ratio (Bank Debt / EBITDA

Minimum Coverage Ratio (EBITDA / Interest
Minimum Fixed Charge Ratio (EBITDA Capex Taxes ) / Interest + Principal Payments)
Maximum Capital Expenditures
Minimum Tangible Net Worth
New Terminology in 2006 and 2007:

Typical Negative Covenants

Green Shoe

Limitations on Additional Debt

Limitations on Asset Sales / Mergers & Acquisitions / Sale/leaseback transactions
Limitations of Dividends / Investments
Limitation on Liens / Negative Pledges
Excess Cash Sweep
Limitations of Change of Ownership

23

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

5. Other Terms & Conditions:

Security / Liens / Guarantees

Mandatory Prepayments

Optional Prepayments / Call Protection

Financial Reporting / Maintaining Corporate Existence (Affirmative Covenants)

Representation and Warranties

Conditions Precedent at Closing

Events of Default

Assignments and Participations / Secondary Sales

Waivers and Amendments

Indemnification

Cross Default

Material Adverse Clause (MAC)

24

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

6. Pricing, Fees and Expenses on Separate Documents:

Fee Letter

Interest Rate (Applicable Margin and Leveraged Grids)

Expenses

25

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

Other Terminology to the Credit Agreement

LIBOR Floor
Original Issuer Discount (OID)
Margin Spread

A typical calculation of Loan Yields in the secondary market for loans:

LIBOR or LIBOR Floor + Margin Spread + (100-OID)/4* years = Loan Yield

*market convention is to use 4 years as it represents the average life

i.e.

LIBOR Floor = 3.00%

Margin Spread = 400 basis points (or 4.00%)
OID = 96

Then the Loan Yield is calculated to:

3.0% + 4.0% + [(100 96)/100]/4 = 7.0% + (4.0% / 4) = 7.0% + 1.0% = 8.0% Yield

26

Typical Leveraged Deal Term Sheet / Credit Agreement

(Continued)

Other Schedules Attached to the Credit Agreement

Intercreditor Agreement
Purchase Agreement
Hedging Arrangement / Hedging Agreement

27

Example of a Large Syndicated Loan

Harrahs Entertainment

28

Example of a Large Syndicated Loan

Harrahs Entertainment
TRANSACTION OVERVIEW
On December 19, 2006, Harrahs Entertainment Inc.
(Harrahs or the Company) announced that it had entered
into an agreement to be acquired by affiliates of Apollo
Management (Apollo) and TPG Capital (TPG) in a
transaction valued at approximately $31.2 billion (including
estimated fees and expenses)
Harrahs Entertainment, based in Las Vegas, Nevada, is the
worlds largest and most geographically diversified gaming
company, operating 50 casinos in six countries, with the #1
or #2 market share in almost every major gaming market in
the U.S.
At the time of the acquisition, Harrahs generated LTM
9/30/07 Net Revenues and Pro Forma Adjusted EBITDA of
$10.6 billion and $2.9 billion, respectively.
Harrahs Operating Company (HOC) owns or manages 43
of the 50 Harrahs Entertainment casinos and generated
LTM 9/30/07 Net Revenues and Pro Forma Adjusted
EBITDA of $8.0 billion and $2.0 billion, respectively

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Example of a Large Syndicated Loan

Harrahs Entertainment
TRANSACTION SOURCES & USES

30

Example of a Large Syndicated Loan

Harrahs Entertainment
STRUCTURE TOO LEVERAGE??

Aggressive Structure??

31

Example of a Large Syndicated Loan

Harrahs Entertainment
CORPORATE STRUCTURE

32

Example of a Large Syndicated Loan

Harrahs Entertainment
SUMMARY OF TERMS SENIOR CREDIT FACILITY

33

Example of a Large Syndicated Loan

Harrahs Entertainment
SYNDICATION GROUP
Lender
Bank of America (Joint Lead Arranger)
Deutsche Bank (Joint Lead Arranger)
Citibank (Joint Bookrunning Managers)
Credit Suisse (Joint Bookrunning Managers)
JP Morgan (Joint Bookrunning Managers)
Merrill Lynch (Joint Bookrunning Managers)
Bear Stearns (Co-Managers)
Goldman Sachs (Co-Managers)
Morgan Stanley (Co-Managers)

34

Example of a Large Syndicated Loan

Harrahs Entertainment
SYNDICATION PROCESS WRONG TIMING FOR AN UNDERWRITTEN DEAL???
The general syndication of Harrah's was launched 1/15/2008 with a bank meeting in New York.
Over 1,000 bankers attended the general syndication meeting with commitments requested by
1/29/2008.
Unfortunately, given the: i) global correction in the financial markets on the week of January 21,
2008, ii) dramatic widening of high yield credit spreads and iii) reduction in the 3-month Libor Rate by
at least 120 bps that followed, the secondary market loan prices pulled back materially and bank
investors started to demand a much higher All-In Yield (about L+ 500) on primary market
transactions, like Harrah's.
Investors were demanding All-In Yield of between L+ 450 - 500 to commit/purchase Harrah's
Term Loan B. Since the offered TLB margin spread was L+300, investors were demanding a
discount (OID) of between 92-93 (compared to the original OID offer of 96.5) from the
Underwriters/Arrangers.
Following the failed syndication, Arrangers in order to reduce their exposure, were offering
Harrah's TLB with an OID in the low 90's.

35

Example of a Large Syndicated Loan

Harrahs Entertainment
SYNDICATION PROCESS WRONG TIMING FOR AN UNDEWRITTEN DEAL?? (continued)
At the time, given such low demand, it was reported that Credit Suisse started to quietly
syndicate their exposure prior to the commitment deadline (1/29/2008), independent of the other
Arrangers.
As a consequence, each of the Arrangers started to syndicate their own exposure to their own
investors offering as low as 90's OID to syndicate their exposure.
After that incident, there was a new agreement made between the Arrangers called The
Memorandum of Understanding (MOU) where it prohibits one arranger to sell their exposure within
an agreeable period (6 months after the commitments are due) without the consent of the other
Arrangers.

36

BIOGRAPHY OF THE LECTURER

Chris Droussiotis, MBA, C.H.E.
Chris Droussiotis has twenty three plus years of banking experience working in the
investment banking divisions of major New York money center banks, such as Bank of
America, CIBC Oppenheimer, Sumitomo Mitsui Banking Corp., Mitsui Nevitt Merchant
Bank, Mizuho Financial Group and Bank of Tokyo-Mitsubishi, specializing in the
financing and structuring of merger & acquisition, leveraged buyout and recapitalization
transactions.
Chris is currently the Head of the Leveraged and Sponsor Finance Group at Sumitomo Mitsui Banking
Corporation managing a $1.4 billion investment portfolio of leveraged loan investments.
Duties include portfolio analysis, valuation, financial projections, credit assessment, as well as interaction with
issuers, broker-dealers, investment banks, Private Equity firms and bank management.
Prior to his banking career, Chris taught mathematics and business statistics at FDUs Sullivan Business
School in Rutherford, NJ. He holds a B.Sc. in business, an MBA from FDUs Sullivan School of Business, was
credit trained at Bank of America, and completed advanced professional development courses in corporate
taxation at New York University.
Chris is also an Adjunct Professor of certain finance courses for undergraduate and graduate programs at
Baruch College and FDU including Investment Analysis, Quantitative Analysis in Business, Managerial
Accounting, Business Statistics and Advanced New Venture Management.
Chris has given various lectures on various subjects including Leveraged Buyouts, Credit Markets, Capital
Markets for Baruch College, as well as companies such as Cendant Corporation, Wyndham Worldwide,
Travelocity and the Industrial Bank of Japan.
Chris is also the president and founder of CSD&A, a financial consulting firm established in 1989 to assist
companies with business plan development, quantitative analysis, financial modeling, enterprise valuation,
Portfolio Anaysis, M&A, and debt and equity capital procurement.

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