Debt syndication, also known as syndicated finance or syndicated loans, is a new yet vibrant strategy commonly used in investment banking. When a group of lenders joins hands to provide credit to a borrower, the process is known as syndicated finance or debt syndication. Since a syndicated loan is a structured financial product and requires the involvement of more than one financing institution, borrowers often seek help from a consulting firm.
Read on to find out more about debt syndication and its process. This article also highlights the benefits of syndicated finance and how investment bankers use it to scale up their operations.
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What is syndicated finance?
Syndicated finance or debt syndication is the process through which a borrower requiring a large amount of money applies for it and the group of lenders, or the syndicate, approves the loan. In syndicated finance, the amount each lender contributes depends on their level of risk exposure.
Since syndicated finance is a document-intensive and structured financing instrument, borrowers may need to contact a third-party consulting firm for guidance. Generally, corporations, fund houses or public and private sector enterprises apply for syndicated finance.
Initially, several Fortune 500 companies requiring money for large projects applied for syndicated finance. The concept became popular, and now, many large corporations, investment banks and SMEs apply for syndicated loans. These loans are primarily used for financing industrial projects and mergers and acquisitions or takeovers.
Since the requirements of sectors such as investment banking are continually rising, syndicated finance is likely to grow even further.
Now that we know what syndicated finance is, let us understand the participants in debt syndication.
Participants in syndicated finance
Participants in debt syndication may differ from one deal to another, but the distinctive participants are as follows:
- Mandated lead arranger (MLA) – The MLA is the lead financial institution that facilitates and synchronises the transaction. The MLA is responsible for the initial transaction, loan monitoring, compliance reports and comprehensive reporting for all lending parties.
- Specialists – Specialists may be engaged in some stages of the loan syndication or repayment process to support reporting and monitoring.
- Corporate risk manager – A corporate risk manager is involved in managing agreements made between the loan recipient and the lender to avoid misunderstanding and implement contractual commitments. The borrower may involve its legal counsel to implement the loan agreement and the obligations promised by the lender.
- Consulting firms – Consulting firms provide guidelines and market research on syndicated finance by bringing together loan market participants/members and borrowers.
- Trustee – A trustee is appointed to hold the assets assigned as security by the loan recipients on behalf of the lenders. The trustee is responsible for enforcing the security under direction of the syndicate as and when there is a default of loan repayment.
Let us now understand the advantages of syndicated finance and the role it plays in investment banking.
Advantages of syndicated finance
The following are the main advantages of syndicated finance:
Saves time and effort
Syndicated finance saves a borrower’s time by eliminating the need to visit multiple lenders. The consulting firm usually takes the lead and connects the borrower to the MLA, who then contacts other lenders, establishes the syndicate and arranges the loan.
Since multiple lenders come together to approve the syndicated loan, the borrower can benefit from a wide variety of loans with different types of interest and repayment terms. Syndicated finance pricing is determined on the prevailing LIBOR or base rate, also known as the benchmark rate.
Higher loan amount
Syndicated finance allows a borrower to receive a significant loan amount for financing big projects. Sometimes, the government or large corporations might need substantial capital for financing mergers and acquisitions, lease equipment, etc. Generally, it is challenging for a single lender to fund such a large project. Since syndicated finance involves several lenders, the chances of loan approval are higher.
Since syndicated finance involves multiple lenders, it sends a positive signal about the borrower’s reputation. Borrowers who have repaid syndicated loans earlier may get an edge in securing credit facilities from financial institutions.
Seamless loan amount disbursal
The syndicated finance approval process might be lengthy. It often takes more than three months from the time of loan application to approval. The investment banker’s active involvement in the process – from project analysis to loan documentation and preparing presentations – ensures a seamless process for the borrower.
Syndicated finance has become bigger and better than before. Current market conditions, coupled with rating downgrades, make it ripe for investment bankers to facilitate syndicated loans. In fact, the income generated accounts for a sizeable portion of investment banking revenue.
Many firms take pride in being a top choice for reputed commercial, corporate and investment banks. Besides providing research and analytical support, a team of experts can simplify loan restructuring, credit monitoring, loan syndication and trading, and infrastructure finance, and offer deal origination support. From deal origination and pitching to approval and monitoring, a good finance research and analysis company can help you apply for syndicated finance with ease.