Loan Syndication Definition, How It Works, Types, Example

Loan Syndication

Investopedia / Michela Buttignol

What Is Loan Syndication?

The term "loan syndication" refers to the process of involving a group of lenders that fund various portions of a loan for a single borrower. Loan syndication most often occurs when a borrower requires an amount that is too large for a single lender or when the loan is outside the scope of a lender's risk exposure levels. Multiple lenders pool together and form a syndicate to provide the borrower with the requested capital.

Key Takeaways

  • Loan syndication occurs when two or more lenders come together to fund one loan for a single borrower.
  • Syndicates are created when a loan is too large for one bank or falls outside the risk tolerance of a bank.
  • The banks in a loan syndicate share the risk and are only exposed to their portion of the loan.
  • A loan syndicate always has a syndicate agent, which is the lead bank that organizes the loan, its terms, and other relevant information.
  • The Loan Syndications and Trading Association provides resources on loan syndications within the corporate loan market.

Understanding Loan Syndications

Loan syndication is often used in corporate financing. Firms seek corporate loans for a variety of reasons, including funding for mergers, acquisitions, buyouts, and other capital expenditure projects. These capital projects often require large amounts of capital that typically exceed a single lender's resource or underwriting capacity.

There is only one loan agreement for the entire syndicate. But each lender's liability is limited to their respective share of the loan interest. With the exception of collateral requirements, most terms are generally uniform among lenders. Collateral assignments are generally assigned to different assets of the borrower for each lender. The syndicate does allow individual lenders to provide a large loan while maintaining more prudent and manageable credit exposure because the associated risks are shared with other lenders.

The agreements between lending parties and loan recipients are often managed by a corporate risk manager. This reduces any misunderstandings and helps enforce contractual obligations. The primary lender conducts most of the due diligence, but lax oversight can increase corporate costs. A company's legal counsel may also be engaged to enforce loan covenants and lender obligations.

The Loan Syndications and Trading Association 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.

Bank of America Securities, JPMorgan, Wells Fargo, and Citi are among the industry’s leading syndicators in the U.S. loan market, as of the first quarter of 2021.

Special Considerations

For most loan syndications, a lead financial institution is used to coordinate the transaction. This institution is often known as the syndicate agent. This agent is also often responsible for the initial transaction, fees, compliance reports, repayments throughout the duration of the loan, loan monitoring, and overall reporting for all lending parties.

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.

Example of a Loan Syndication

Let's say Company ABC wants to buy an abandoned airport and convert it into a large development with a sports stadium, multiple apartment complexes, and a mall. To do this, it needs a $1 billion loan.

The company goes to JPMorgan. The bank approves the loan. But because it's such a large amount and greater than the bank's risk tolerance, it decides to form a loan syndicate.

JPMorgan acts as the lead agent and brings together other banks to participate. It contracts Bank of America, Credit Suisse, Citi, and Wells Fargo to participate in the loan. JPMorgan contributes $300 million to the loan, and the remaining $700 million is shared between the other syndicate members. Bank of America lends out $200 million, Credit Suisse $100 million, Citi $250 million, and Wells Fargo $150 million.

As the lead bank, JPMorgan also organizes the terms, covenants, and other details needed for the loan. Once complete, Company ABC receives the $1 billion loan through the loan syndicate.

How Does Loan Syndication Work?

Loan syndication is a process that involves multiple banks and financial institutions who pool their capital together to finance a single loan for one borrower. There is only one contract and each bank is responsible for their own portion of the loan. One institution acts as the lead and is responsible for getting other banks on board, documentation, collateral assignment, and distribution of payments from the borrower.

Who Are the Parties Involved in Loan Syndication?

Loan syndication is a process that involves the borrower and two or more banks. One bank acts as the lead or the syndicate agent and is responsible for overseeing documentation and repayment. This bank then filters payments to the remaining banks.

How Does a Loan Syndication Affect the Borrower?

Loan syndication doesn't affect borrowers any differently than other types of loans. The borrower generally applies for a loan at one bank. If approved, this institution approaches others to form a syndicate, which allows them each to spread the risk. After the loan is advanced, the borrower signs a single contract, which names every member of the syndicate and their contribution to the loan. Regular payments are made to the lead bank, which divides it up among syndicate members.

What Are the Disadvantages of the Loan Syndication Process?

The main drawback to the loan syndication process is the amount of time it takes to get approved (or denied). That's because it can take a number of days (even weeks) to get approval and the syndicate together.

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