A loan syndication quiet simply put is a process of providing a loan when the lender giving the amount of loan are more than one. The word loan syndication is self explanatory in that regard. A loan simply refers to giving someone an amount of money that is to be returned at a later date for a particular price. The word syndication highlights a group of individuals or in agreement with one another looking to achieve one single task.
What Is Loan Syndication?
What is Loan Syndication?
The use of Loan syndication is often made in situations where the demand for the sum of money to be lent is particularly high and that amount is too much for a single lender to be able to provide. There can even be situations where although the lender may be able to grant such a large amount of loan it may not be proportionate to the levels of risk exposure needed at that level.
Hence in such a situation a number of different lenders will work together in contention to provide the borrower with the required capital needed. The rate for the loans will typically be decide between the syndicate and the borrower and the syndicate will all need to agree with one another on it.
Why are they used?
The use of loan syndication is not extremely common and will only be carried out in a number of extremely large applications of loan. One of the most important reason why it is often used is because it allows the lender to be able to provide a portion of the loan and still ensure that its credit exposure level if within its set limit.
All of the situations mentioned above require a considerable amount of money to be able to function.
The most common use of loan syndication is made in:
- Buyouts etc
The Process of Loan Syndication
- The first thing that you need to do get a syndicated loan is t o go up to an appropriate lead bank and initiate the proceedings of drafting a loan agreement. If the agreement present to the bank is accepted by the bank they will contact you, tell you the basic structure of the loan and ask you to sign on the loan agreement. Once the loan agreement has been signed the legal liability of the loan is on the bank and the requirement of assembling a consortium to finance the loan is also a responsibility of the bank.
- The process also includes a time when the documents for the syndicated will be drawn up. This job will be carried out by the lawyer of the legal bank.
- Before the loan is agreed on, the bank will wait for the replies of the people or institutions invited to become a part of the consortium. Once they agree, they will determine the agreements of the loan amongst themselves and give the lead bank the authority to negotiate on their behalf.
- The lead bank will then negotiate the terms of the syndicated loan with the borrower and only when both parties agree will a legally binding agreement come into force and the loan syndicated.