What is a Lead Bank?
A lead bank is a bank that oversees the arrangement of loan syndication. The lead bank receives an additional fee for this service, which involves recruiting the syndicate members and negotiating the financing terms. In the Eurobond market, the lead bank acts in an agent capacity for an underwriting syndicate.
BREAKING DOWN Lead Bank
The third meaning of this term is simply the primary bank of an organization that uses several banks for several different purposes.
The Role of the Lead Bank in Loan Syndication
In loan syndication, multiple banks will work together to provide a borrower with the capital needed. Loan syndications generally form for corporate borrowing purposes, including for mergers, acquisitions, buyouts, and other capital projects. Situations that require loan syndication will usually involve a borrower who needs a large sum of capital that may be too much for a single lender to provide and/or outside the scope of this lender's risk exposure levels.
A lead bank, in this case, is 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. Lead banks of loan syndications may charge high fees because of the vast reporting and coordination efforts needed to complete and maintain loan processing. These fees can be as high as 10% of the loan principal.
At times the lead bank may rely on a third party and/or additional specialists throughout various points of the loan syndication or repayment process to assist with reporting and monitoring.
The Role of the Lead Bank in Securities Underwriting
In an initial public offering (IPO) or other forms of issuing securities, a lead bank may organize a group of underwriters, also called the underwriting syndicate, for the deal. As with a loan syndicate, the purpose of an underwriting syndicate is often to spread out risk and/or merge funds in a large deal.
Lead banks will assess an issuing company’s financials and current market conditions to arrive at an initial value and quantity of shares to be sold. Newly issued shares may carry a hefty sales commission for an underwriting syndicate (at times, nearly 6%–8%); however, the largest portion of shares will go to the lead bank.