Definitions

amount-risk

Syndicated loan

A syndicated loan (or "syndicated bank facility") is a large loan in which a group of banks provide funds for a borrower, usually several but without joint liability. There is usually a lead bank or group of banks (the "Arranger/s" or "Agent/s") that takes a percentage of the loan and syndicates or sells the rest to other banks. In contrast, a bilateral loan, only involves one borrower and one lender (often a bank or financial institution.) A syndicated loan is a much larger and more complicated version of a participation loan. There are typically more than two banks involved in a syndication.

Syndicated loans can be underwritten or arranged on a best endeavours basis. Where a loan is underwritten the Arrangers or Agents guarantee the terms and conditions and costs of the loan BEFORE it is sold to other banks, essentially removing the market risk for the Borrower.

Reasons for syndicated lending

A primary reason for loan syndication is risk mitigation. Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If the bank's cost of funds is a hypothetical 5%, the bank needs to charge more than 10% interest on the loan to make a profit. In general, banks and the financial markets use risk-based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans, however, is that there are fewer of them. So, if the bank has the only large business loan and if that business happens to be one of the 5% that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their large loans with each other, so each get a representative sample in their loan portfolios.

Banks also often face prudential or internal concentration limits with regard certain borrowers which may require loans be syndicated regardless of the credit or default risk applicable to that counterparty.

A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and instead usually provides small and more predictable losses. Smaller and more predictable losses are favored by many management teams because of the general perception that companies with "smoother" or more steady earnings are awarded a higher stock price relative to their earnings (benefiting management who is often paid primarily by stock). Critics, such as Warren Buffett, however, say that many times this practice is irrational. If the bank could still get a representative sample by not syndicating, and if syndication would reduce their profit margins, then over the long term a bank should make more money by not syndicating. This same dynamic plays out in the investment banking and insurance fields, where syndication also takes place.

From the Borrowers point of view, a syndicate of banks provides access to a larger pool of funding than may be available from a single bank or lender and creates relationships that can be used to procure other finance products, often with competitve tension.

Roles and Responsibilities

Syndicated loans may also include parties required to manage the unusual multiple financier relationships and associated fiduciary obligations.

To avoid the borrower having to deal with all the syndicate banks individually, one of the syndicate banks usually acts as an Agent for all syndicate members. The Agent acts as the focal point between the lenders and the borrower and manages all administrative aspects of the loan including drawdowns, repayments, fees, reporting & compliance, loan monitoring and requests for changes to the loan facility. The Agent is empowered in the loan documentation to act upon a vote of the Lenders in circumstances where a decision has to be communicated back the the borrower. Most decisions require a majority vote (between 50.1% and 90% or lenders consenting depending upon market) or a 100% decision for important matters such as the loan amount, risk margin and other similar decisions.

Where a facility is secured, a trust can be used as a vehicle to share the benefit of the securities between syndicate members. The Security Trustee is appointed to act in the interest of the Lenders who become beneficiaries of the security trust. The security trustee is often the facility Agent but can be a separate lender in the syndicate or an independent 3rd party trustee.

Syndicated Loan Markets

Syndicated Loans are international in their understanding however certain geographical regions maintain unique attributes. The broad international markets are North America, EMEA and Asia. Within Asia, based upon size and volume of loans, Japan is often singled out as a significant market.

The syndicated loan market could be roughly divided into two "classes" of syndicated loans. The first, designed for smaller companies (loan sizes approximately between 20 to 250 million), feature funds usually lent by a fixed group of banks for a fixed amount. In North America and Europe, larger loans than this are often open to be traded, so that they almost become more like a regular bond. Purchasers of these loans include hedge funds, pension funds, banks, and other investment vehicles. Asian markets have limited numbers of loans that are freely traded this way.

Until the subprime lending crisis, larger syndicated loans, although "agented" by one bank, were often sold to the international capital markets after repackaging into trusts and being sold as collateralized loan obligations. For larger loans, there was some evidence that the Agent banks would often Underwrite portions of these loans specifically for onselling as collateralized loan obligations. This Underwriting may have been in excess of the broader expected appetite of traditional Lenders. With the collapse of many aspects of the international fixed income (lending) capital markets due to the subprime crisis, many banks were stuck with Underwritten positions, potentially on terms they would not have lent on for the entire stated period of the business loan. These are known as "hung" or "stuck" underwrites or loans and have been responsible for a portion of the recent losses of financial institutions.

Largest Syndicated lenders in the United States in 2006

Name Market share
JP Morgan 28.9%
Banc of America Securities LLC 21.4%
Citigroup 14.7%
Wachovia 5.6%
Wells Fargo 4.8%
Deutsche Bank AG 3.4%
Royal Bank of Scotland Group 2.1%
Goldman Sachs & Co 2.0%
Merrill Lynch 1.9%
Barclays Capital 1.8%
Credit Suisse 1.8%

EMEA Bookrunner ranking full year 2006

Rank Name Volume ($m) Deals % Market share
1 RBS 73,181.59 112 6.99
2 Citi 70,824.57 95 6.76
3 BNP Paribas 66,591.44 165 6.36
4 Deutsche Bank 45,594.37 42 4.35
5 Calyon 44,716.73 88 4.27
6 JP Morgan 38,399.01 39 3.67
7 SG Corporate & Investment Banking 37,564.89 73 3.59
8 Dresdner Kleinwort 26,173.32 47 2.50
9 HSBC 21,855.72 47 2.09
Subtotal 472,090.49 574 45.06
Total 1,047,639.18 1,425 100.00

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