UNDERSTANDING SYNDICATED LOAN AND ITS PROCESS...

Large organizations like multinational corporations and government occasionally need to borrow money just like you. When they do so, they often go to banks. But borrowing for massive expenses is Most time challenging and therefore need several lenders to join forces to provide a loan that’s large enough to meet a borrower’s need, Syndicates help make those loans happen. Before I delve into its process, I shall be explaining what syndicated loan is and its benefits from both the borrower’s & Lender’s perspective.

What Is a Syndicated Loan?

A syndicated loan is a loan from a group of banks to a single borrower. When an individual lender is incapable or unwilling to fund a particularly large loan, borrowers can work through one or more lead banks to arrange to finance. In loan syndication there are mainly 2 parties, the lender and the borrower, the lender is comprised of the lead bank, the participating banks and the agents. Usually the bank of the borrower’s choice which agrees to raise the required amount is the lead bank and the staff of the bank charged with the responsibility of seeing that relationship to its logical end is the lead manager. The lead manager works with the borrower to arrive at interest rates, payment terms, and other details described.

From a borrower’s perspective, syndicated loans make it relatively easy to borrow a significant amount. The borrower can secure funding with one agreement instead of attempting to borrow from several different lenders individually.

From a lender’s perspective, syndicated loans enable financial institutions to take on as much debt as they have an appetite for or as much as they can afford due to regulatory lending limits. Lenders can stay diversified but still participate in large, high-profile deals. What’s more, they gain access to industries or geographic markets that they don’t ordinarily work with. These loans are contractual obligations, making them like other sources of capital, and they may even be secured with collateral.

How Syndicated Loans Work

Loans come in a variety of forms, and a single loan might have several different types of debt.

Revolving debt: allows borrowers to take only what they need when they need it and come back for more later. Lenders set a maximum credit limit, and borrowers may be able to borrow and repay repeatedly (or “revolve” the debt) against a line of credit.

Term loans: provide one-time financing that borrowers typically pay off with gradually with fixed payments. Some term loans feature a large balloon payment at maturity instead of amortizing payments.

Letters of credit (LCs): are bank guarantees that provide security to somebody the borrower is working with. For example, a standby letter of credit might protect a municipality that pays millions of naira for an infrastructure project—but the contractor fails to complete the project. The LC would provide funds to the municipality (at the contractor’s expense), enabling them to pay other contractors or fix the problem in other ways.

Other arrangements may exist, such as delayed-draw lines, which provide approved funding that borrowers use over a period for planned expenditures.

A syndicated loan might feature several different terms. For example, a loan might have a portion of the debt due in seven years, with the remainder due after ten years. Plus, those loans might have interest rates that are fixed for the life of the loan or variable interest rates that fluctuate with an index (such as LABOR)

Who Uses Syndicated Loans?

Syndicated loans make sense when a loan is too big for any individual lender to reasonably offer. Government bodies might borrow for massive infrastructure improvements requiring hundreds of millions. A company might borrow to purchase equipment or build sophisticated facilities for large-scale manufacturing. Businesses use these loans to buy other companies, and they also obtain syndicated loans to refinance existing debts.

Lenders include large financial institutions such as banks and finance companies, as well as institutional investors who want to earn interest by participating in syndicates. In some cases, the lenders sell their interests or assign the loan to other investors, so they can replenish cash and reduce their exposure to any individual borrower.

THE SYNDICATION PROCESS

The process of loan syndication can be split into 3 main stages namely; the contract/ Mandate stage, the contractual documentation stage and the post signing/credit administration stage.

The contract/mandate stage: this is where the background work for the successful persecution of a syndication are initiated. The loan applicant draws up its credit requirement and the most suitable package that will maximize its expected utility. This catalog of requirements is presented to the bank or banks that can help in procuring the desired credit. if the loan is more than the banks’ lending limits, the bank may suggest to the loan applicant that the desired credit be raised through a syndicate. An acceptance of this by the loan applicant confirms mandate to syndicate the facility, haven given the mandate the lead bank then initiated a program for actualizing the syndication. To sell this project to other financial institution, the lead bank must prepare a confidential memorandum which will state the terms and conditions under which the lead bank as been mandated by the customer to raise credit, a brief description about the borrower, the main shareholders/promoters of the company, the directors and the management team. The memorandum may contain a disclaimer clause which urge the participating banks to carry out their independent credit appraisal. The next important stage after the memorandum is the meeting of all the participating lenders to review the mandate obtained by the lead bank.

The contract documentation stage: at this stage, the consent is given, and various agreement are reach. The lead bank arranges the drafting of all legal document to bind all the parties. All the parties involved must then vet the document before they are executed. The legal instruments are the loan agreement, the agreements between the lender and the security requirement for the loan.

The post signing/credit administration stage: This essentially is the process of managing the loan amount. All participating banks are involved in the execution of the loan agreement. the draw down schedule will be supervised by all the participating banks. The lead bank assumes the role of the active player in the credit management. The banks sees to the proper utilization of the disbursed funds and monitors the progress of the project while keeping other participants duly informed.

EXAMPLES OF NOTABLE LOAN SYNDICATION BY BANKS IN NIGERIA

First Bank of Nigeria Plc: First bank of Nigeria is known for its consistent participation/leading of loan syndication in Nigeria in 2001, the bank led the N15 million to develop the marine and oil sector of the economy, between 2004-2005, the bank led a syndication of $185 million for the acquisition of GSM license by NITEL $72 million for NITEL expansion. In 2005, it led a syndication of N60 Billion to Dangote group. In addition to the bank consistent role as a lead bank, it also acts as a participant bank in some syndication.

In 2005, 8 Nigerian banks teamed with 20 international Banks to provide $600 Million for NNPC/EXOON mobile satellite oil program. Nigeria banks raised $160 million. The 8 local banks that participated are:

v Union Bank of Nigeria Plc

v United Bank of Africa Plc

v Access Bank Plc

v Zenith Bank Plc

v Guarantee Trust Bank Plc

v First Bank Plc

v Standard Chartered Bank Limited

v Investment Bank and trust company plc

References:

https://www.researchgate.net/

https://startcredits.com/syndicated-loans-nigeria/

https://www.assignmentpoint.com/business/banking/internship-report-on-syndicated-loan-practiced.html