Syndicated Loan As A Product Of Corporate Banking

 
Syndicated Lending/Loan As A Product Of Corporate Banking
Corporate banking is known as the tailor-made financial services which commercial banks offer to corporations such as medium, large, and multinational corporations in the context of corporate financing and raise capital.

Basically, corporate banking is a specialized segment of a commercial bank that offers various banking solutions, such as credit management, asset management, cash management, and underwriting to medium, large, multinational corporations and small and medium enterprises (SME). Loans and advances are rescue for businesses experiencing financial difficulties or seeking growth in an economy.  

The term “corporate banking “originated in 1933 in the United States. The division was established to create a distinction from investment banking. In India, it is a recent trend that is growing popular day-by-day. Many domestic, local, private and foreign banks have adopted this concept and are providing tailor-made corporate banking solutions to their corporate clientele.

The basic reason why corporate banking is important in an economy of a country is profit. Hence, Corporate banking is the source of the highest profits for the banks.

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For some banks, it is the key source of earnings, simply because it involves corporations with large working capital. Usually, corporate loans involve large sums of money that has a higher rate of interest when compared to regular loans.

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Hence, syndicated lending/loan forms part of the services rendered by commercial banks through the corporate banking segment. Syndicated lending is a type of loan, created by group of lenders given to a borrower in accordance with the loan agreement. Syndicated loan is characterized by much larger facilities, multiple lenders with a loan agreement, and a bank that manages drawdown, repayments and ongoing administration.

Also, a syndication is categorized into “Underwritten” in which the lead arranger and/or small group of co-writers agree to underwrite the full loan amount. There is also the “Best efforts” which is a deal where the lead arranger does not underwrite any or all of the loan amount because the level of demand is unclear. If this is the case and the syndication is undersubscribed, the deal may not proceed or might only proceed for a lower amount. In addition, there is the “Club deal” which is a deal that is privately arranged by a small group of banks often three to five in number. Such banks are often existing bankers to the borrower which makes such deals easier and quicker to complete. Club deals are unlikely to be traded in the secondary market.

Furthermore, syndicated loan is governed by some terms and conditions which include an amortizing, a balloon or a bullet repayment structure, a secured or an unsecured or linking to a lending base and a short term tenure which can be 2-3years, or up to 10 years. Hence, there are various parties involved in a syndicated loan which includes the borrower, lead bank/arranger/mandated lead arranger (MLA), book runner, participating bank, underwriting bank, agent bank, and security trustee.

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The “Borrower” is the party that grants a mandate to the lead bank and is responsible for repaying the loan amount and interest to the agent bank based on the loan agreement, while the “Lead Bank or Arranger or MLA” is responsible for arranging the syndicated loan.

This includes negotiating with the customer in relation to the terms and conditions, price, tenor, and facility structure. “The Bookrunner” is the bank that manages the process of forming the syndicate (that is, selling the loan to other banks in the syndicated loan market). Furthermore, the “Participating Bank” is the bank that agrees to accept a portion of the risk of a syndication and it is sub-divided into Lead Managers, Co-managers and Co-arrangers. The “Underwriting Bank” agrees to underwrite all or part of a syndicated loan.

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In other words, this bank commits to providing the borrower with the necessary funds in the event that the loan is not fully subscribed. Also, there is the agent bank which is responsible for administering the loan and, as such, performs a key management role in the transaction, by requesting fund from the participating banks in proportion to their contributions, making payment to the borrower, receiving repayment (both interest and principal) from the borrower as at when due and paying the same to the participating banks proportionately or to other debt holders. Finally there is the “Security Trustee” who is an independent party that holds any collateral/security on behalf of the syndicate.

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In addition, there are some structures termed facilities involved in a syndicated loan which includes “Term loan” which is referred to as a loan with fixed term and repayment. There is also the “Revolving credit facilities”, in which a credit limit is agreed upon, and it is similar to an overdraft where a customer can draw down and repay amount as and when required (provided the covenant is complied with). It also includes the “Project finance facilities” which is in form of a letter of credit and guarantee to project sponsors. Finally, there is the “Standby lines of credit” which are generally committed credit limits that are only expected to be drawn on in case of need.

Hence, a syndication requires the following process which include firstly, determining the borrower’s needs. Then identifying the stages involved which include, awarding the mandate: For instance, Gusher Industries, an oil refinery, requests a syndicated loan based on the following requirements: Amount: USD 400 million, fully underwritten, Facility type: Unsecured term loan, Tenor: Five years, Repayment structure: Bullet, Purpose: Business acquisition, Timeframe: To be completed within three months. This is followed by arranging the syndication, then post drawdown loan management.

In conclusion, up to the point that a syndication has been successfully completed and all participants have achieved their target hold, the most significant risk is the market conditions or the borrower's creditworthiness change which can result in pulling the loan, insufficient loan demand, adverse price movements, higher funding costs and liquid market. Given these significant downsides, it is important that, before any commitments are given by underwriters, the risks of a significant and adverse market movement or changes in the borrower’s condition are assessed and deemed acceptable.

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