Loan Syndication vs. Consortium: An Overview
A loan syndication usually occurs when multiple banks lend money to a borrower all at the same time and for the same purpose. In a very general sense, a consortium is any group of individuals or entities that decide to pool resources toward a given objective. A consortium is usually governed by a legal contract that delegates responsibilities among its members. In the financial world, a consortium refers to several lending institutions that group together to jointly finance a single borrower.
These multiple banking arrangements are very similar to a loan syndication, although there are structural and operational differences between the two.
- Loan syndications are generally reserved for loans involving international transactions, different currencies, and necessary banking cooperation.
- A consortium is usually governed by a legal contract that delegates responsibilities among its members.
- Consortium financing occurs for transactions that might not take place with a single lender.
While a loan syndication also involves multiple lenders and a single borrower, the term is generally reserved for loans involving international transactions, different currencies, and a necessary banking cooperation to guarantee payments and reduce exposure. A loan syndication is headed by a managing bank that is approached by the borrower to arrange credit. The managing bank is generally responsible for negotiating conditions and arranging the syndicate. In return, the borrower generally pays the bank a fee.
Loan syndication is the most common way for European and American corporations to seek financing from banks and other lenders. In Europe, loan syndication is primarily driven by private equity sponsors, while in the U.S., corporate borrowers and private equity sponsors drive the loan syndication market in equal measures.
The managing bank in a loan syndication is not necessarily the majority lender, or "lead" bank. Any of the participating banks may act as lead or assume the responsibilities of the managing bank depending on how the credit agreement is drawn up.
A loan syndication is similar to a consortium, although there are structural and operational differences between the two.
Like a loan syndication, consortium financing occurs for transactions that might not take place with a single lender. Several banks agree to jointly supervise a single borrower with a common appraisal, documentation, and follow-up and own equal shares in the transaction. Unlike in a loan syndication, there is not one lead bank that manages the financing project; all of the banks play an equal role in managing the project.
Consortiums are not built to handle international transactions such as a syndication loan. Instead, a consortium may arise because the size of the project at hand is simply too large or too risky for any single lender to assume. While loan syndications typically work across borders and may handle financing in different currencies, consortiums typically occur within the boundaries of a given nation.
Sometimes the participating banks form a new consortium bank that functions by leveraging assets from each institution and disbands after the project is complete. By allowing all of the members to pool their assets, consortiums allow smaller banks to tackle larger projects.