Loan Syndication

Definition:
A syndicated loan is one in which two or more banks (the syndicate of lenders)
contract with a borrower to provide loan on common terms and conditions governed by
a common document or set of documents.
The broad definition of a syndicated loan embodies the principal features of the
product. It is a multi-bank transaction with each bank acting on a several basis – each
bank acts as underwriter and/or lender, on its own without responsibility for the other
banks in the syndicate. If a bank fails to honor its obligations as a member of a bank
syndicate, the other syndicate banks have no legal duty to satisfy these obligations on
that behalf. The agent bank will usually consult with the borrower in such circumstances
and attempt to find a wiling replacement bank or banks – although it is not obliged to
do so.
As per Encyclopedia of Banking and Finance (EBF), “Syndication” means a temporary
association of parties for financing and execution of some specific business purpose.
EBF also defines “Syndicated Loan ”as loans extended by multiple banks where the
overall credit involved exceeds an individual lender’s legal lending or other limits.
Syndicated loan is made available by a group of FIs in predefined proportions under the
same credit facility following common loan documentation formalities.

Necessities of loan syndication:

Need for loan syndication:
 The borrower wants to raise amount of money quickly and conveniently.
 The amount exceeds the exposure limits or appetite of any one lender.
 The borrower does not want to deal with large number of lender.

Mechanism of loan syndication:

 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:
  Executive Summary
 Investment Considerations
 Summary of Terms and Conditions (Term Sheet)
 Transaction Overview
 Company
 Management and Equity Sponsor Overview
 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 deal’s 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 Under subscribed, 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.

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
 Internal Legal Review
 KYC (know-your-customer) and Compliance Review.

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 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 - Issuer’s Cash Flow covering it’s debt obligations (interest
and principal payments)
 Variance of Projections – based on the projections, the model typically
assumes a certain haircut (10-30%) to the management’s projections and
it tests it’s 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 bank’s internal policy. The
Analysis would include strength of management, support from the equity sponsor,
recovery analysis (asset collateral) and outlook.

Parties to Syndication loan:

Loan syndication is different from club financing (where many banks finance a single
borrower and Agent) in terms of deal origination, mechanism, documentation,
disbursement, monitoring, management, etc. Essential Characteristics: (i)single
borrower, (ii)more than one lender, (iii)common  loan & security documentation.
The lead bank and participating banks are the main parties involved in loan syndication.
In large loan amounts, sometimes there are four parties involved, other than the
borrower, in the syndication process. These are arranger {lead manager/ bank},
underwriting Bank, Participating Banks and the facility manager agent. Their role are
defined as follows:
1. Arranger/lead manager: It is a bank which is mandated by the prospective
borrower and is responsible for placing the syndicated loan with other banks and
ensuring that the syndication is fully subscribed. This bank charges arrangement fees
for undertaking the role of lead manager. Its reputation matters in the success of
syndication process as the participating banks would agree or disagree based on the
credibility and assessment expertise of this bank. In other words, since the appraisal of
the borrower and its proposed venture is primarily carried out by this bank, onus of
default is indirectly on this bank. Thus this bank carries reputation risk in the
syndication process.
2. Underwriting bank: Syndication is a process of arranging loans, success of which
is not guaranteed. The arranger bank may underwrite to supply the entire remainder
(unsubscribed) portion of the desired loan and in such a case arranger itself plays the
role of “underwriting bank”. Alternatively a different bank may underwrite (guarantee)
the loan or portion (percentage of the loan). This bank would be called the
“underwriting bank”. It may be noted that all the syndicated loans may not have this
underwriting arrangement .Risk of underwriting is obviously the “underwriting risk”. It
means it will have to carry the credit risk of the larger portion of loan.
3. Participating banks: These are the banks that participate in the syndication by
lending a portion of the total amount required. These banks charge participation fees.
These banks carry mostly the normal credit risk i.e. risk of default by the borrower. As
like any normal loan. These banks may also be led into passive approval and
complacency risk. It means that these banks may not carry rigorous appraisal of the
borrower and has proposed project as it is done by the lead manager and many other
participating banks. It is this banker’s trust that so many high profile banks cannot be
wrong. This may be seen in the light of reputation risk of the lead manager.

4. Facility manager/agent: Facility manager takes care of the Administrative

arrangements over the term of the loan (e.g. Disbursements, repayments and
compliance). It acts for and on behalf of the banks. In many cases the
arranging/underwriting bank itself may undertake this role. In larger syndications co-
arranger and co-manager may be used.

Practice of loan syndication:

Prime Bank Arranges Tk 2Bln syndicate Term Loan for BRAC A syndicated term loan
agreement for Tk 2 billion (Tk 200 crore) in favoring BRAC was signed recently at a city
hotel under the lead arrangement of Prime Bank Limited. Presided over by Prime Bank
Managing Director M Shahjahan Bhuiyan, the ceremony was attended by Prime Bank
Limited Board of Directors Executive Committee Chairman Imam Anwar Hossain as the
chief guest and BRAC Executive Director Abdul Muyeed Chowdhury as the guest of
honour. The syndicated term loan has been sanctioned for the micro-credit lending
program of BRAC, which one of the world’s largest non-government organizations
(NGOs) is operating in the country. By arranging this syndicated term loan facility,
Prime Bank Limited has created an opportunity for local and foreign commercial banks
to demonstrate their shared commitment to meet the challenge of the International Year
of Microcredit, 2005.
Prime Bank arranges tk 150m syndicated loan for ceccl Dhaka, Bangladesh (BBN)-
Prime Bank Limited (PBL) has successfully concluded a BDT 150 million syndicated
loan agreement as lead arranger with two other private commercial banks for Configure
Engineering and Construction Company Limited (CECCL) for setting up a five-star hotel
in Cox’s Bazar. The two other banks are the Pubali Bank Limited and the Mutual Trust
Bank Limited.
Prime Bank to hike investment Syndicated loan in telecom, power projects Prime Bank
has planned to scale up financing in infrastructures including the capital-intensive
power and telecom sectors as part of its efforts to boost industrialization in the country,
its chief executive officer (CEO) said Monday.
The 15-year-old private bank, over the last decade raised around Tk. 11.5 billion through
syndicated financing as lead arranger while providing funds worth of another Tk. 4.5
billion either as participating banks. This year, the bank has already arranged Tk. 850
million under such scheme for Sea Pearl Beach Resort and Spa Limited in Cox’s Bazar,
which is set to be the first five star resort in Bangladesh promoting international time
sharing. Earlier, the bank also played a pioneering role in raising syndication loan for
the country’s first vacuum evaporated salt re-crystallization plant, the first hydrogen
peroxide project and the first ever float glass manufacturing plant. In 2006, the bank
arranged the first ever Sharia’h based syndicated investment facility and at the same
time, it has imparted training on syndication techniques and practices for central bank
officials, officials said.

Prospects of Syndicated Loan in Bangladesh:

Term loans provided by the financial system in Bangladesh amount to only about
US$250-300 million per year, equivalent to about 1.5 percent of Gross Domestic
Product (GDP), while private and public investment amounts to about 16 percent of
GDP. A major constraint to the provision of term loans is the lack of a well-developed
long-term savings market. Nationalized Commercial Banks (NCBs) fund their term
loans mainly with their deposits creating a maturity mismatch.
Proper Syndication Loan Procedure examines the needs of both borrowers and lenders
involved in the design, origination, arrangement, distribution and management of
syndicated loans and link the process of executing a successful deal to the optimal
design of a syndication unit. For the following reason financial institutions can go
syndicated loan market.
 The entry of financial institutions into the corporate loan market has helped
improve the transparency and liquidity of the secondary loan market, at the
expense of increased overall loan borrowing costs.
 As the large investment is increasing day to day, borrower needs fund without
minimum transaction hassle with minimum funding cost. Government also
restricted the funding limit of the financial institutions. In this situation loan
syndication seems a better solution for both the borrower and loan provider.
 Most important issue is the risk associated with big projects. These types of risks
can be minimized by evaluating properly and monitoring regularly the projects
and with the borrowers.
 Most prospective and large investment sectors in Bangladesh are Power, Telecom
Textile Industries, Steel Mills, Cement, Sugar Mills, Private Container Terminal,
Gas Evaporation Project, Infrastructure Development Projects, School & Hospital
through foreign joint venture, Information & Communication Technology etc.
 After phasing out of Multi Fiber Agreement (MFA) our country is realizing more
intensely the importance of backward linkage industry to support and sustain our
garments sector in the face of emerging harsh competition because through this
phase out garments industry will lose their protected market to other competitors
of the region. Garments sector contributes 36 % of the total export-earnings of the
country.
 Investment banks are relatively new entrants into the commercial lending
business and lend to less profitable, more leveraged firms than do commercial
banks.
 The presence of a dual market maker is found to increase liquidity in the
secondary market for syndicated bank loans.