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.
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. Company legal counsel may also be engaged to enforce loan covenants and lender obligations.
How Loan Syndication Is Used In Corporate Financing
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.
Corporate risk managers need to manage primary lender relationships with secondary loan providers.
Financial Institution Coordinates Loan Syndication
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.
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 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.