What Is Loan Syndication?
Loan syndication is the process of involving a group of lenders in funding various portions of a loan for a single borrower. Loan syndication most often occurs when a borrower requires an amount too large for a single lender to provide or when the loan is outside the scope of a lender's risk exposure levels. Thus, multiple lenders form a syndicate to provide the borrower with the requested capital.
- Loan syndication is when a group of lenders come together to fund various portions of a single loan for a single borrower.
- Loan 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.
Understanding Loan Syndication
Loan syndication is often used in corporate financing. Firms seek corporate loans for a variety of business reasons that include funding for mergers, acquisitions, buyouts, and other capital expenditure projects. These types of capital projects often require large amounts of capital that typically exceed a single lender's resource or underwriting capacity.
Loan syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because the associated risks are shared with other lenders. Each lender's liability is limited to their respective share of the loan interest.
Generally speaking, with the exception of collateral requirements, most terms are uniform among lenders. Collateral assignments are generally assigned to different assets of the borrower for each lender. Usually, there is only one loan agreement for the entire syndicate.
The agreements between lending parties and loan recipients often need to be managed by a corporate risk manager to reduce misunderstandings and to enforce contractual obligations. The primary lender conducts most of this 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.
In the United States loan market, Bank of America, JPMorgan, Wells Fargo, and Citi have been the industry’s leading syndicators of loans in recent years.
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.
Loan Syndicate Agent
For most loan syndications, a lead financial institution is used to coordinate the transaction. The lead financial 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. Fees can be as high as 10% of the loan principal.
Example of a Loan Syndication
Company ABC is interested in purchasing an abandoned airport and converting it into a large development, consisting of a sports stadium, multiple apartment complexes, and a mall. It is looking for a loan in the size of $1 billion.
ABC heads to JPMorgan to discuss obtaining a loan, which JPMorgan agrees to, but because the loan is such a large size and greater than JPMorgan's risk tolerance, the bank decides to form a loan syndicate to provide the loan to Company ABC.
JPMorgan acts as the lead agent on the syndicated loan, bringing 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 remaining members of the syndicate. Bank of America lends out $200 million, Credit Suisse $100 million, Citi $250 million, and Wells Fargo $150 million.
As the lead bank on the loan syndicate, JPMorgan also organizes the terms, covenants, and other details needed for the loan. Once the process is complete, Company ABC receives the $1 billion loan through the loan syndicate.