What is 'Loan Syndication'
Loan syndication is the process of involving several different lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that may be too much for a single lender to provide or outside the scope of a lender's risk exposure levels. Thus, multiple lenders work together to provide the borrower with the capital needed.
BREAKING DOWN 'Loan Syndication'Loan syndication is used in corporate borrowing. Companies seek corporate loans for a wide variety of reasons. Loan syndication is commonly needed when companies are borrowing for mergers, acquisitions, buyouts and other capital projects. These types of capital projects often require large loans, thus loan syndication is mainly used in extremely large loan situations.
Loan syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because the lender is not the only creditor on the deal. Large capital projects for corporate borrowers often need very large sums of capital to complete the transaction; therefore, more than one single lender is often relied upon for loan funding. Within the loan syndication process, terms from all of the lenders on the deal are typically the same although they may vary. Collateral requirements by the lenders can often vary considerably. Usually there is only one loan agreement for the entire syndicate.
Lead Financial Institution
For most loan syndications, a lead financial institution is used to coordinate all aspects of the deal. The lead financial institution is often known as the syndicate agent. This agent is also often responsible for all aspects of the deal including the initial transaction, fees, compliance reports, repayments throughout the duration of the loan, loan monitoring and overall reporting for all lenders within the deal. A third party or additional specialists may be used throughout various points of the loan syndication or repayment process to assist with various aspects of reporting and monitoring. Loan syndications often require high fees because of the vast reporting and coordination required to complete and maintain the loan processing. Fees can be as high as 10% of the loan principal.
In 2015, Charter Communications topped the list of leveraged loan-funded syndications at $13.8 billion for its merger with Time Warner Cable. Credit Suisse was the lead syndicator on the deal. In the United States loan market, Bank of America Merrill Lynch, JPMorgan, Wells Fargo and Citi are the industry’s leading syndicators of loans.
The Loan Syndications and Trading Association (LSTA) is an established organization within the corporate loan market that seeks to provide resources on loan syndications. It helps to bring together loan market participants, provides market research and is active in influencing compliance procedures and industry regulations.