Loan Syndication

INTRODUCTION:

Syndicated lending is a form of lending in which a group of lenders collectively extend a loan to a single borrower. The group of lenders is called a syndicate. The loan is called a syndicated loan, in contrast to a bilateral loan, which is a loan made by a single lender to a single borrower. Syndicated loans are routinely made to corporations, sovereigns or other government bodies. They are also used in project finance and to fund leveraged buyouts. Syndicated loans are primarily originated by banks, but a variety of institutional investors participate in syndications. These include mutual funds, collateralized loan obligations, insurance companies, finance companies, pension plans, and hedge funds.

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Syndicate members play different roles. Some just lend money. Others also facilitate the process. t is common to speak of an arranger, lead bank or lead lender that originates the loan, forms the syndicate and processes payments. !ut several syndicate members may share these tasks.

Syndications with two or more arrangers are not uncommon. n a world where bragging rights are important for securing future deals, a bank may be called an arranger for nothing more than contributing a large part of the loan. "oans can be underwritten or originated on a best efforts basis. n the former case, the arrangers commit to a particular sized loan. t is up to them to recruit enough syndicate members to secure that full amount. Should they fail, they make up the shortfall, extending a larger portion of the loan than they had perhaps wanted. #ith a best efforts deal, the arrangers try to recruit enough syndicate members to achieve a desired loan size. f they fail, however, the borrower simply receives a smaller loan than it had hoped for. The borrower in a syndicated loan incurs two expenses. One is the interest on the loan. The other is fees. These can take various forms, depending on how the loan is structured. $ees may include an administration fee, upfront fee, underwriting fee, commitment fee, facility fee, utilization fee, etc. Syndicated loans, like most loans, pose credit risk for the lenders. This can be extreme, as with some leveraged buyouts or loans to some sovereigns. %redit risk is assessed as with any other bank loan. "enders rely on

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detailed financial information disclosed by the borrower. &s syndicated loans are bank loans, they have higher seniority in insolvency than bonds. Syndication has been used for decades on an as'needed basis by banks wanting to spread the risk of large loans. The market took off following the first, ()*+, oil shock. &s the price of oil skyrocketed, banks recycled deposits from oil exporting countries as syndicated loans to oil importing countries, especially less'developed countries in "atin &merica. The second oil shock, of (),(, and the $ed-s experimentations with monetarism, caused interest rates to shoot up in the early (),.s. & number of less'developed countries/including &rgentina, !razil, 0exico, the 1hilippines and 2enezuela /defaulted on their floating'rate loans. $ormer Treasury Secretary 3icholas !rady spearheaded a bailout on behalf of the 4S 5overnment. This combined considerable debt forgiveness with a repackaging of loans as bonds collateralized by 4S Treasuries. %alled !rady bonds, these instruments were actively traded in a secondary market. &s the market for syndicated lending to less'developed countries dried up, 0ichael 0ilken was launching a wave of leveraged buyouts 6"!Os7 financed in part by syndicated loans. The market experienced retrenchment again as "!Os faltered, but syndicated lending entered the ()).s as a mature market serving a variety of sovereign and corporate borrowers. 8uring the ()).s, an active secondary market for syndicated loans emerged. This was fueled partly by the recession of ())(, which forced some banks to trim their balance sheets. Secondary market trading continued a convergence of the syndicated loan and bond markets. &s those markets converge, the disparity in how they are regulated presents both

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opportunities and legal uncertainties. n the 4nited States, most bonds are regulated under the ()++ &ct and ()+9 &ct. !ank loans generally are not, and arrangers of syndicated loans invoke a number of exemptions under those acts to avoid regulation

MEANING:
& syndicated loan can be defined as two or more lending institutions jointly agreeing to provide a credit facility to a borrower. The basic structure involves a lead manager who represents the lending group 6the participating banks7. Syndicated credit facility may include term loans, standby facilities revolving credit facilities, specialized facilities like export finance and bridge finance facilities. Syndicated credit facilities could be for of short'term, medium'term maturity or long'term. "oan'syndication generally comprises multiple loan tranches with different features and terms. "onger' term tranches are structured for institutional investors, such as insurance companies and investment funds, with longer investment horizons.

DEFINITION:
:& Syndicated facility is a lending facility, defined by a single loan agreement, in which several or many banks participate.;

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Loan Syndication

Types of Syndications:

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5lobally, there are three types of underwriting for syndications< an underwritten deal, best'efforts syndication, and a club deal. The =uropean leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the 4.S. market contains mostly best'efforts.

Underwritten deal:
&n underwritten deal is one for which the arrangers guarantee the entire commitment, then syndicate the loan. f the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credit>s fundamentals, improve. f not, the arranger may be forced to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit. &rrangers underwrite loans for several reasons. $irst, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually re?uire more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flex'language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

Best-efforts syndication:
& best'efforts syndication is one for which the arranger group commits to underwrite less than the entire amount of the loan, leaving the credit to the vicissitudes of the market. f the loan is undersubscribed, the

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credit may not close/or may need major surgery to clear the market. Traditionally, best'efforts syndications were used for risky borrowers or for complex transactions. Since the late ()).s, however, the rapid acceptance of market'flex language has made best'efforts loans the rule even for investment' grade transactions.

Club deal:
& club deal is a smaller loan/usually @ABC(.. million, but as high as @(B. million/that is premarketed to a group of relationship lenders. The arranger is generally a first among e?uals, and each lender gets a full cut, or nearly a full cut, of the fees.

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THE

SYNDICATION

PROCESS :

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"everaged transactions fund a number of purposes. They provide support for general corporate purposes, including capital expenditures, working capital, and expansion. They refinance the existing capital structure or support a full recapitalization including, not infre?uently, the payment of a dividend to the e?uity holders. They provide funding to corporations undergoing

restructurings, including bankruptcy, in the form of super senior loans also known as debtor in possession 68 17 loans. Their primary purpose, however, is to fund 0D& activity, specifically leveraged buyouts, where the buyer uses the debt markets to ac?uire the ac?uisition target>s e?uity. n the 4.S., the core of leveraged lending comes from buyouts resulting from corporate activity, while, in =urope, private e?uity funds drive buyouts. n the 4.S., all private e?uity related activities, including refinancings and recapitalizations, are called sponsored transactionsE in =urope, they are referred to as "!Os. & buyout transaction originates well before lenders see the transaction>s terms. n a buyout, the company is first put up for auction. #ith sponsored transactions, a company that is for the first time up for sale to private e?uity sponsors is a primary "!OE a secondary "!O is one that is going from one sponsor to another sponsor, and a tertiary is one that is going for the second time from sponsor to sponsor. & public'to'private transaction 61A17 occurs when a company is going from the public domain to a private e?uity sponsor.

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&s prospective ac?uirers are evaluating target companies, they are also lining up debt financing. & staple financing package may be on offer as part of the sale process. !y the time the auction winner is announced, that ac?uirer usually has funds linked up via a financing package funded by its designated arranger, or, in =urope, mandated lead arranger 60"&7. !efore awarding a mandate, an issuer might solicit bids from arrangers. The banks will outline their syndication strategy and

?ualifications, as well as their view on the way the loan will price in market. Once the mandate is awarded, the syndication process starts. n =urope, where mezzanine capital funding is a market standard, issuers may choose to pursue a dual track approach to syndication whereby the 0"&s handle the senior debt and a specialist mezzanine fund oversees placement of the subordinated mezzanine position. The arranger will prepare an information memo 6 07 describing the terms of the transactions. The 0 typically will include an executive summary, investment considerations, a list of terms and conditions, an industry overview, and a financial model. !ecause loans are unregistered securities, this will be a confidential offering made only to ?ualified banks and accredited investors. f the issuer is speculative grade and seeking capital from nonbank investors, the arranger will often prepare a :public; version of the 0. This version will be stripped of all confidential material such as management financial projections so that it can be viewed by accounts that operate on the public side of the wall or that want to preserve their ability to buy bonds or stock or other public securities of the particular issuer 6see the 1ublic 2ersus

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1rivate section below7. 3aturally, investors that view materially nonpublic information of a company are dis?ualified from buying the company>s public securities for some period of time. &s the 0 6or :bank book,; in traditional market lingo7 is being prepared, the syndicate desk will solicit informal feedback from potential investors on what their appetite for the deal will be and at what price they are willing to invest. Once this intelligence has been gathered, the agent will formally market the deal to potential investors. The executive summary will include a description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials. nvestment considerations will be, basically, management>s sales :pitch; for the deal. The list of terms and conditions will be a preliminary term sheet describing the pricing, structure, collateral, covenants, and other terms of the credit 6covenants are usually negotiated in detail after the arranger receives investor feedback7. The industry overview will be a description of the company>s industry and competitive position relative to its industry peers.The financial model will be a detailed model of the issuer>s historical, pro forma, and projected financials including management>s high, low, and base case for the issuer. 0ost new ac?uisition'related loans are kicked off at a bank meeting at which potential lenders hear management and the sponsor group 6if there is one7 describe what the terms of the loan are and what transaction it backs. 0anagement will provide its vision for the transaction and, most importantly, tell why and how the lenders will be repaid on or ahead of schedule. n addition, investors will be briefed regarding the multiple exit

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strategies, including second ways out via asset sales. 6 f it is a small deal or a refinancing instead of a formal meeting, there may be a series of calls or one' on'one meetings with potential investors.7 n =urope, the syndication process has multiple steps reflecting the complexities of selling down through regional banks and investors. The roles of each of the players in each of the phases are based on their relationships in the market and access to paper. On the arrangers> side, the players are determined by how well they can access capital in the market and bring in lenders. On the lenders> side, it is about getting access to as many deals as possible. There are three primary phases of syndication in =urope. 8uring the underwriting phase, the sponsor or corporate borrowers designate the 0"& 6or the group of 0"&s7 and the deal is initially underwritten. 8uring the sub'underwriting phases, other arrangers are brought into the deal. n general syndication, the transaction is opened up to the institutional investor market, along with other banks that are interested in participating. n the 4.S. and in =urope, once the loan is closed, the final terms are then documented in detailed credit and security agreements. Subse?uently, liens are perfected and collateral is attached. "oans, by their nature, are flexible documents that can be revised and amended from time to time after they have closed. These amendments re?uire different levels of approval. &mendments can range from something as simple as a covenant waiver to something as complex as a change in the collateral package or allowing the issuer to stretch out its payments or make an ac?uisition.

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oan

Ma!"et Pa!ticipants :

There are three primary'investor constituencies< banks, finance companies, and institutional investorsE in =urope, only the banks and institutional investors are active. n =urope, the banking segment is almost exclusively made up of commercial banks, while in the 4.S. it is much more diverse and can involve a commercial bank, a savings and loan institution, or a securities firm

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that usually provides investment'grade loans. These are typically large revolving credits that back commercial paper or are used for general corporate purposes or, in some cases, ac?uisitions. $or leveraged loans, 4.S. banks typically provide unfunded revolving credits, letters of credit 6"O%s7, and/although they are becoming increasingly less common/amortizing term loans, under a syndicated loan agreement. =uropean banks fund and hold all tranches within the credit structure. $inance companies have consistently represented less than (.F of the leveraged loan market, and tend to play in smaller deals/@ABCA.. million. These investors often seek asset'based loans that carry wide spreads and that often feature time'intensive collateral monitoring. nstitutional investors in the loan market are principally structured vehicles known as collateralized loan obligations 6%"O7 and loan participation mutual funds 6known as :prime funds; because they were originally pitched to investors as a money'market'like fund that would approximate the prime rate7 also play a large role. &lthough 4.S. prime funds do make allocations to the =uropean loan market, there is no =uropean version of prime funds because =uropean regulatory bodies, such as the $inancial Services &uthority 6$S&7 in the 4.G., have not approved loans for retail investors. n addition, hedge funds, high'yield bond funds, pension funds, insurance companies, and other proprietary investors do participate opportunistically in loans. Typically, however, they invest principally in wide' margin loans 6referred to by some players as :high'octane; loans7, with spreads of B.. bps or higher over the base rate.

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%"Os are special'purpose vehicles set up to hold and manage pools of leveraged loans. The special'purpose vehicle is financed with several tranches of debt 6typically a H&&&> rated tranche, a H&&> tranche, a H!!!> tranche, and a mezzanine tranche7 that have rights to the collateral and payment stream in descending order. n addition, there is an e?uity tranche, but the e?uity tranche is usually not rated. %"Os are created as arbitrage vehicles that generate e?uity returns through leverage, by issuing debt (. to (( times their e?uity contribution. There are also market'value %"Os that are less leveraged /typically three to five times/and allow managers more flexibility than more tightly structured arbitrage deals. %"Os are usually rated by two of the three major ratings agencies and impose a series of covenant tests on collateral managers, including minimum rating, industry diversification, and maximum default basket. n the 4.S., %"Os had become the dominant form of institutional investment in the leveraged loan market by A..*, taking a commanding I.F of primary activity by institutional investors. !ut when the structured finance market cratered in late A..*, %"O issuance tumbled and by mid'A..,, the %"O share had fallen to 9.F. n =urope, over the past few years, other vehicles such as credit funds have begun to appear on the market. %redit funds are open'ended pools of debt investments. 4nlike %"Os, however, they are not subject to ratings oversight or restrictions regarding industry or ratings diversification. They are generally lightly levered 6two or three times7, allow managers

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significant freedom in picking and choosing investments, and are subject to being marked to market.

n addition, in =urope, mezzanine funds play a significant role in the loan market. 0ezzanine funds are also investment pools, which traditionally focused on the mezzanine market only. Jowever, when second lien entered the market, it eroded the mezzanine marketE conse?uently, mezzanine funds expanded their investment universe and began to commit to second lien as well as payment'in'kind 61 G7 portions of transaction. &s with credit funds, these pools are not subject to ratings oversight or diversification re?uirements, and allow managers significant freedom in picking and choosing investments. 0ezzanine funds are, however, riskier than credit funds in that they carry both debt and e?uity characteristics. Ketail investors can access the loan market through prime funds. 1rime funds were first introduced in the late (),.s. 0ost of the original prime funds were continuously offered funds with ?uarterly tender periods. 0anagers then rolled true closed'end, exchange'traded funds in the early ()).s. t was not until the early A...s that fund complexes introduced open' ended funds that were redeemable each day. #hile ?uarterly redemption funds and closed'end funds remained the standard because the secondary loan market does not offer the rich li?uidity that is supportive of open'end funds, the open' end funds had sufficiently raised their profile that by mid'A.., they accounted for (B'A.F of the loan assets held by mutual funds.

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&s the ranks of institutional investors have grown over the years, the loan markets have changed to support their growth. nstitutional term loans have become commonplace in a credit structure. Secondary trading is a routine activity and mark'to'market pricing as well as leveraged loan indexes have become portfolio management standards.

Credit Facilities:
Syndicated loans facilities 6%redit $acilities7 are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the re?uirement. There are four main types of syndicated loan facilities< a revolving creditE a term loanE an "O%E and an ac?uisition or e?uipment line 6a delayed'draw term loan7. & revolving credit line allows borrowers to draw down, repay and reborrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowing 6the facility fee7. n the 4.S., many revolvers to speculative'grade issuers are asset' based and thus tied to borrowing'base lending formulas that limit borrowers to a certain percentage of collateral, most often receivables and inventory. n =urope, revolvers are primarily designated to fund working capital or capital expenditures.

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oan Ma!"et O#e!#ie$:

The retail market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors. The balance of power among these different investor groups is different in the 4.S. than in =urope. The 4.S. has a capital market where pricing is linked to credit ?uality and institutional investor appetite. n =urope, although institutional investors have increased their market presence over the past decade, banks remain a key part of the market. %onse?uently, pricing is not fully driven by capital market forces. n the 4.S., market flex language drives initial pricing levels. !efore formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit. &fter this market read, the arrangers will launch the deal at a spread and fee that it thinks will clear the market. 4ntil ()),, this would have been it. Once the pricing, or the initial spread over a base rate which is usually " !OK, was set, it was set, except in the most extreme cases. f the loans were undersubscribed, the arrangers could very well be left above their desired hold level. Since the ()), Kussian financial crisis roiled the market,

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however, arrangers have adopted market'flex language, which allows them to change the pricing of the loan based on investor demand/in some cases within a predetermined range/and to shift amounts between various tranches of a loan, as a standard feature of loan commitment letters.

n =urope, banks have historically dominated the debt markets because of the intrinsically regional nature of the arena. Kegional banks have traditionally funded local and regional enterprises because they are familiar with regional issuers and can fund the local currency. Since the =urozone was formed in ()),, the growth of the =uropean leveraged loan market has been fuelled by the efficiency provided by this single currency as well as an overall growth in merger D ac?uisition 60D&7 activity, particularly leveraged buyouts due to private e?uity activity. Kegional barriers 6and sensitivities toward consolidation across borders7 have fallen, economies have grown and the euro has helped to bridge currency gaps. &s a result, in =urope, more and more leveraged buyouts have occurred over the past decade and, more significantly, they have grown in size as arrangers have been able to raise bigger pools of capital to support larger, multi'national transactions. To fuel this growing market, a broader array of banks from multiple regions now fund these deals, along with =uropean institutional investors and 4.S. institutional investors, resulting in the creation of a loan market that crosses the &tlantic. The =uropean market has taken advantage of many of the lessons from the 4.S. market, while maintaining its regional diversity. n

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Loan Syndication
=urope, the regional diversity allows banks to maintain a significant lending influence and fosters private e?uity>s dominance in the market.

OTHER

AD%ANTAGES OANS :

OF

SYNDICATED

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Loan Syndication

n addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include<

Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.

$lexibility in structure and pricing. !orrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techni?ues, and prepayment rights without penalty.

Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.

"oan terms can be abbreviated. ncreased feedback. Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.

Syndicated loans bring the borrower greater visibility in the open market. !unn noted that L$or commercial paper issuers, rating agencies view a multi'year syndicated facility as stronger support than several bilateral one'year lines of credit.L

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SYNDICATE FORMATION:

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& borrower-s ability to secure a syndicated loan, though, is predicated on its ability to spur the creation of a syndicate in the first place. L3o two syndications are identical,L wrote !unn. LThe market changes every day. 0any intangibles influence the structure and pricing of a credit, including the experience and depth of a company-s management teamE trends in the industry and marketE and financial trends within a company.L

The first thing the company has to do is select an agent to facilitate communications and transactions between the borrower and the banking institutions that will form the syndicate. LThe first place to look for an agent is among your existing relationships,L said $idler and 3eumeyer. L%ertainly you will want a bank that has the necessary syndication capability and experience to obtain market credibility. &lthough the agent need not always be the largest participant in the syndication, the agent should have

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sufficient capital strength to be the anchor for the credit. 0ost important, however, is that you are comfortable with the bank. !ecause the agent is acting on your behalf, they must fully understand your business and share your attitudes and priorities.L Once an agent has been selected, the process of finding willing banks is undertaken. This phase of the process can vary considerably in terms of complexity. Some agents gauge the interest level of other lenders by simply sending them necessary financial information on the borrower and the intended shape and size of the syndicate group, as well as data on borrower operations, background, management, and marketing. !unn noted that in other cases, however, this process can be more complex, involving extensive due diligence, the preparation of a complete syndication offering memorandum 6including financial projections7, and a formal bank presentation. !y and large, the length of time necessary to form a bank group is roughly e?uivalent to the complexity of the proposed deal. %reation of a syndicate can take place over the course of a few weeks or a few months. &nalysts note, however, that the length of time necessary to conclude the deal is usually less if the banks are already familiar with the borrower-s operations. Once the membership of the group has been determined, the relationship ?uickly assumes the character that the borrowing business would expect when dealing

with a single lending institution. LThis is not to say that the borrower relin?uishes control over the process and the participants will still actively call on the borrower,L noted $idler and 3eumeyer. L t is merely the interaction between the participating banks that should diminish/to your benefit. The

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agent should educate you about the market and help you navigate the specifics of pricing and structuring the transaction.L ndeed, the agent-s responsibilities are many and varied. The agent is charged with administering the syndicated facility itself, as well as all borrowings, repayments, interest settlements, and fee payments. & chief component of the administration function is to make sure that communications between the lending institutions and the borrower remain open so that both sides remain informed about changing business and market realities. n return for providing these services, the agent is compensated with an annual fee.

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Syndicated E#o&'tion:

oan Ma!"et An

The syndicated loan market, a hybrid of the commercial banking and investment banking worlds, is globally one of the largest and most flexible sources of capital. Syndicated loans have become an important corporate financing techni?ue, particularly for large firms and increasingly for midsized firms.

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This earlier version of the syndicated loan market was essentially a private market with no transparency or li?uidity 6&sarnow and 0c&dams ()),7. n contrast, the :new syndicated loan market,; in its most developed state in the 4nited States 6and increasingly in other nations7, comprises an active market'driven primary distribution process and an active secondary loan market to facilitate adjustments after the primary syndication phase. Thus, the corporate loan market has come to assume some of the features of publicly traded bond and e?uity markets. n this new world of banking, lending is conducted on a transaction'by'transaction basis, reflecting multilateral lending structures 6%hart (7. %orporate lending has historically been viewed as a key function, perhaps the core function, of commercial banks. $or many years corporate lending primarily involved a series of bilateral arrangements between the borrower and one or more individual banks. This earlier version of the syndicated loan market was essentially a private market with no transparency or li?uidity 6&sarnow and 0c&dams ()),7. n contrast, the :new syndicated loan market,; in its most developed state in the 4nited States 6and increasingly in other nations7, comprises an active market'driven primary distribution process and an active secondary loan market to facilitate adjustments after the primary syndication phase. Thus, the corporate loan market has come to assume some of the features of publicly traded bond and e?uity markets. n this new world of banking, lending is conducted on a transaction'by'transaction basis, reflecting multilateral lending structures.

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Syndicated loans 6as utilized both during the primary' distribution phase and in subse?uent secondary'market trading7 can be viewed as one of a group of :credit'risk'transfer; instruments n fact, the origins of many of the features of the contemporary syndicated loan market in the 4nited States go back to the period of corporate restructuring, strategic buyouts, and leveraged ac?uisitions, which started in the (),.s, when lenders were looking for more efficient ways to manage their rapidly expanding credit exposures. n fact, the origin of many of the features of the contemporary syndicated loan market goes back to the period of corporate restructuring, strategic buyouts, and leveraged ac?uisitions, when lenders were looking for more efficient ways to manage their rapidly expanding credit exposures. n the ()).s, this market continued to evolve in the context of global trends for financial innovation, greater integration of capital markets, and more efficient pricing of all financial instruments. Today, the global syndicated loan market operates as a true capital market that is more professional, efficient, and transparent than its earlier incarnation, as evidenced by an evolving set of standardized institutional arrangements. The significant changes in recent years that have contributed to the evolution of the new corporate loan market include< The emergence of a group of large syndication banks The rapid growth in the non'investment'grade portion of the market, which offers higher fees. The emergence of syndicated loans as a new asset class. The growth of an active and relatively li?uid secondary market for loans.

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Structure and Operation :

& syndicate consists of a group of lenders that agree jointly to make a loan to a borrower, with all lenders sharing common loan documentation. "ead banks is one who has won the :mandate; to manage

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syndicates on behalf of the borrower. &fter arranging or underwriting a particular loan the syndicate is disbanded. Syndicate structure is composed of the share of the loan taken up by various participants and consists of a number of participating institutions. Syndicates show a certain :adherence,; in that the same lead bank can fre?uently bring together more or less the same syndicate for the same borrower. The lead bank can also be called the agent bank, or the arranger or book'runner. $or large transactions, the lead bank can bring in one or more co' leads. There might be managers or agents, co'managers and co'agents, and, finally, participants, each being allocated successively smaller portions of the loan. The practices may also vary, depending on the individual transaction. &nd whereas there is only one loan agreement for the syndicate, from a legal viewpoint each participating institution is a direct lender to the borrower from the inception of the loan, with every participant>s claim on the borrower evidenced by a separate security note. n some cases, the entire loan will be sold to the participating institutions. The lead bank or arranger that leads the loan fre?uently coordinates administrative operations, including the documentation process, the loan closing, the handling of loan advances, and the administration of repayments. &lternatively, another bank/referred to as the administrative agent or documentation agent/may be appointed to handle these functions. The lead bank or arranger is typically granted an important coordination role for the syndicate.

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3ormally the lead bank is re?uired to obtain the approval of a majority of syndicate members. Similarly, the lead bank would normally not declare a borrower to be in default on the loan before consulting with the members of the syndicate. The book'running function refers to the arranger>s role in selecting the number and identity of institutions that will be invited to participate in the syndication."ead !anks earn higher fees, because they take a larger part of the facility and the percentage fee rate applied to their share of the facility is higher.

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Unde!$!itin( Tec)ni*'es:
& syndication can be carried out using two basic approaches<

Best-efforts

approach

Firm-commitment approach
4nder the best'efforts approach, the lead bank reaches an agreement with the borrower on the proposed size of the borrowing and the key terms of the loan agreement. 4nder this approach, at the start of the financing the lead bank does not guarantee the borrower that it will be able to obtain the re?uired funding it wants at the desired terms. The final size and terms of the loan will depend on the success of the subse?uent syndication or marketing process. The lead bank generally reserves the right to cancel the syndication if a sufficient amount of the loan is not subscribed to by other

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banks. The borrower can also choose to cancel if it becomes evident that sufficiently attractive terms cannot be obtained. 4nder the firm'commitment approach, the lead bank makes a legally binding commitment to the borrower to underwrite the entire amount of the loan.

Syndication:
Once the mandate is awarded, the arranger is ready to start the syndication process. This is called the primary'distribution phase of the loan. The syndication unfolds as a multi'step process that is similar, in many ways, to the underwriting of a corporate bond or stock issue. The lead bank prepares an information memorandum that contains descriptive and financial information about the borrower and the proposed loan. Kecipients of the memorandum are subject to a confidentiality agreement, by which they agree not to disclose sensitive information. The lead bank and the borrower meet with prospective participant banks, describe the borrower>s business plan and prospects, and answer any ?uestions about the issue. The intention is to convince a sufficient number of banks to participate in the loan for the targeted amount.

Loan versus bond syndication:

&lthough loan syndications resemble bond underwritings, there are some important differences. n the case of underwriting a bond, the lead investment bank distributes securities to dealers in the syndicate for ultimate resale to investors.

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Loan Syndication
n the case of loan syndication, the lead bank allocates portions of the loan to participating institutions, which in most cases want to hold the loan rather than distribute it. $urthermore, the lead bank in a loan syndication is ?uite likely to have a significant position in the loan once the distribution phase is over. n contrast, the lead underwriter in a bond issue is unlikely to hold the bonds as a long'term investment

I+po!tant

feat'!es

of

t)e

syndicated &oan +a!"et:

This section focuses on the key structural features of the most developed 4.S. version of the syndicated loan market. t distinguishes between the two major classes of borrowers 6investment grade and leveraged7 and describes recent infrastructure developments that have led to a more efficient and transparent market.

he Borrowers:
The two borrower segments of the syndicated loan market are generally the investment grade sector and the leveraged sector. , each of which has some distinct features 60adan ()))7. The most common use of investment' grade syndicated loan facilities is to provide standby lines of credit to commercial paper issuers 6including issuers of securitized or asset'backed commercial paper7.(* These facilities, involving :plain vanilla; structures and the highest'?uality borrowers, are relatively straightforward to put together and

pg. 34

Loan Syndication
most of them are not expected to be used. Therefore, the fees earned by members of the syndicate on these types of transactions tend to be very low. 0arket infrastructure developments leading to greater efficiency many of the most important recent developments in the bank loan market involve making the market more transparent which leads to greater efficiency. 4ltimately, efficiency involves financial markets fully reflecting the forces of supply and demand accurately and ?uickly in market prices.

,enefits Syndications

of fo!

oan t)e

Diffe!in( Pa!ticipants:

pg. 35

Loan Syndication
Typically, a successful financial innovation occurs when a number of the major types of market participants/but not necessarily all/are beneficiaries, meaning that the benefits for the agents of the innovation exceed its cost. n the case of syndicated loans, the range of beneficiaries is apparent.

Benefits of loan syndications for ban!s:

The benefits of loan syndications for banks can vary according to the role of the bank in the syndicate. n general< The syndication techni?ue allows lead banks 6typically, the largest banks7 to compete more effectively with the bond markets for corporate financing business. The techni?ue large loans. &gent banks can tailor the degree of credit risk and interest rate risk they wish to retain by parcelling pieces of the loan through the syndication process. The syndication structure reduces the overall cost of loan origination because it spreads the burden among a number of banks. enables them to utilize their expertise in loan origination and fee collection for structuring, distributing, and servicing

pg. 36

Loan Syndication
!y using the syndication techni?ue, lead banks facing capital or li?uidity constraints can continue to service the borrowing needs of an important client without having to undertake the entire loan. & bank near its regulatory limits with respect to the permitted size of an individual loan or total loans to a single borrower can still originate the loan and pass off a relatively large portion of it to the syndicate. 1articipating banks may be motivated to join syndicates because they lack origination capabilities in certain geographical regions or in certain

types of industries, or because they desire to economize on origination costs. & relatively small bank can lend to a large borrower that it normally would not obtain as a client by taking a share of a syndication."oan syndications are cost'effective methods by which participating banks can diversify their loan portfolios.

Benefits of loan syndications for borrowers:

Syndicated loan markets provide borrowers with a more complete menu of financing options. n effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond markets. This has permitted<

pg. 37

Loan Syndication
The issuers to achieve more market'oriented and cost'effective financing. "oan syndications is more administratively efficient for the borrower than a series of bilateral arrangements' there is only one loan agreement, rather than a series of loan agreements. Of course, syndicated loans will not be the answer in the case of companies that value the control and direct relationships with lenders that traditional bilateral arrangements entail.

Benefits of syndicated loans for institutional investors:

1articipation of new types of investing institutions. These include pension funds, insurance companies, mutual funds, hedge funds, and the securitization vehicles that issue collateralized loan obligations and collateralized debt obligations and are typically managed by commercial and investment banks. These institutions, being investors rather than direct'lending institutions, view syndicated loans as simply another asset class that has a certain uni?ue combination of risk and return properties.A9 they favour the higher'yielding leveraged part of the market, particularly the longer'term tranches.

pg. 38

Loan Syndication

S,I

TOP

GAINER

FROM

OAN

SYNDICATION:

pg. 39

Loan Syndication
The increase in overseas borrowing and merger and ac?uisitions by ndian corporates in A..* has been a tidy earning opportunity for ndian banks. State !ank of ndia jumped to the number one spot in the league table, in terms of fees earned from loan syndication in the &sia 1acific region 6excluding Mapan and &ustralia N7, according to Thompson $inancial $reeman data. The state'run bank was ranked fifth in A..I. % % !ank N moved to the fourth position in A..* from A9th last year.

S! , ndia largest commercial bank, earned @+B million from fees. % % !ank made about @(A million. The total fee earned by league table banks in this region was @A)..I million in A..*. !oth S! and % % !ank have witnessed an improvement in their market share as well. S! -s market share improved from 9.+F in A..I to (AF in A..*, while that of % % !ank rose from (.+F to 9.(F in the same period. S! handled I9 issues and % % !ank managed A, issues in A..*. The focus on syndication fees is aimed at increasing the non' interest income. The pricing hinges on global factors and is market'driven and hence there are no domestic considerations, even if the client happens to be an ndian company, a senior S! executive said. #ith loan proceeds of @9(., billion from (AA transactions, the ndian borrowers dominated the region-s syndicated loan market in A..*, capturing a market share of A9.(F.

pg. 40

Loan Syndication
This year marked the first time that ndian companies were more active in the regional loan market than their Jong Gong and Taiwanese counterparts. The &sian 6ex'Mapan, ex'&ustralia7 loan volumes reached record levels this year, with @()*.9 billion raised from *I) issues. This represented an increase of AA.BF from @(I(.( billion garnered in A..I. 5lobal syndicated lending reached @9.B trillion in A..* from @9 trillion in A..I, representing an increase of (+.9F, despite credit concerns in the second half of A..*. 5lobal 0D& activity drove lending, as ac?uisition financing 6including leveraged buyouts7 comprised (A).AF of the overall activity in A..*.

Conc&'sion:

pg. 41

Loan Syndication

This special feature has presented a historical review of the development of the market for syndicated loans, and has shown how this type of lending, which started essentially as a sovereign business in the ()*.s, evolved over the()).s to become one of the main sources of funding for corporate borrowers. The syndicated loan market has advantages for junior and senior lenders. t provides an opportunity to senior banks to earn fees from their expertise in risk origination and manage their balance sheet exposures. t allows junior lenders to ac?uire new exposures without incurring screening costs in countries or sectors where they may not have the re?uired expertise or established presence. 1rimary loan syndications and the associated secondary market therefore allow a more efficient geographical and institutional sharing of risk origination and risk'taking. $or instance, loan syndications for emerging market borrowers tend to be originated by large 4S and =uropean banks, which subse?uently allocate the risk to local banks. =uro area banks have strengthened their pan'=uropean loan origination activities since the advent of the single currency and have found funding for the resulting risk outside the euro area. Jowever, we find that the geographical integration of the market appears to vary among regions, as reflected in varying degrees of international penetration. #hile these differences could also be related to disparities in the sizes of national markets, further research is needed to improve our understanding of market contestability by assessing whether they are systematically related to differences in loan pricing, especially fees.

pg. 42

Loan Syndication

CASE STUDY:

pg. 43

Loan Syndication

Case study-" CORPORATE CITIGROUP:

pg. 44

GO%ERNANCE

AT

Loan Syndication

#$ %O&UC #O$:
n A..A, %itigroup, head?uartered in 3ew Oork, was the seventh largest company+ in the world according to the $ortune 5lobal B... The group generated net revenues of @*(.+ billion 9 and net income of @(B.+ billionB 6,F growth over the previous year7. %itigroup, formed by the merger of Travelers 5roup and %iticorp in ()), had emerged as the largest financial services company in the world offering services to its clients through four global business groups across (.. countries. %itigroup was organized into various business segments. 5lobal %onsumer 5roup 65%57 offered services like banking, lending and investment servicesE %redit cards and %harge cards I such as 0aster%ard and 2 S&E truck financing, construction, material handling, healthcare and office e?uipment financeE and consumer finance and community'based lending services. 5lobal %orporate and nvestment !ank 65% !7 provided various services to corporate, institutional and retail investors ' fixed income underwriting, syndicated loans*, foreign exchange and futuresE strategic and financial advisory services like ac?uisitions, mergers, financial restructurings and cash managementE and trade and treasury services like integrated cash management, treasury, trade finance and e'commerce solutions. %itigroup 5lobal 0arkets 6%507, a division of 5% !, oversaw global private wealth management and e?uity research, providing comprehensive financial planning and advisory services to high networth investors...

pg. 45

Loan Syndication

E-ce!pts:
he Board of &irectors:
The !oard-s primary responsibility was to ensure effective governance that would protect the interests of its stakeholders. t was also responsible for the formation of committees for various functions and overseeing the management of the organization and compliance with various standards, laws, rules and regulations.

Board Committees:
#ith assistance from the 3%5% and after consultation with individual directors, the !oard appointed the members of the standing committees. &ll the committees except the =xecutive %ommittee were presided over and operated by independent directors, on periodical rotation within committees. $rom time to time, the !oard also established and maintained additional committees as necessary or appropriate. The !oard and each committee had the power to hire andPor terminate the services of independent, legal, financial or other advisors, as was necessary, without consulting or obtaining the approval of any officer of the company in advance...

Code of Conduct:

pg. 46

Loan Syndication
& code of ethics 6see =xhibit< 27 applied to the executive officer of %itigroup and its reporting subsidiaries and all professionals worldwide serving in finance, accounting, treasury, tax or an investor relations role. The 3%5% monitored the employees- compliance with the %ode of %onduct, the %ode of =thics for $inancial 1rofessionals and other internal policies and guidelines...

Concludin' $otes
8espite its efforts to introduce the highest standards of corporate governance practice, %itigroup had some concerns. On A, th &pril A..+, %itigroup-s %50 6brokerage arm of 5% !7 reached a settlement with S=% on charges of research analysts- conflict of interest, and agreed to pay a penalty of @(B. million and additional @(B. million towards disgorgement. n a settlement with S=%, Mack !. 5rubman, a research analyst at %50, agreed to pay @*.B million as disgorgement and an additional @*.B million in penalties on charges, of publishing false and misleading research reports, in favor of some telecom companies.

Case study-( THE STATE ,AN. OF INDIA/ THE %RS STORY:

pg. 47

Loan Syndication
LThey are propagating the 2KS in such a manner that the employees are being compelled to opt for the scheme.L )*+*,upta- SB# employee.s union leader in &ecember (///*

)%S roubles:
n $ebruary A..(, ndia-s largest public sector bank 61S!7, the State !ank of ndia 6S! 7 faced severe opposition from its employees over a 2oluntary Ketirement Scheme 62KS7. The 2KS, which was approved by S! board in 8ecember A..., was in response to $ederation of ndian %hambers of %ommerce and ndustry-s 6$ %% 7 ( report on the banking industry. The report stated that the ndian banking industry was overstaffed by +BF. n order to trim the workforce and reduce staff cost, the 5overnment announced that it would be reducing its manpower. $ollowing this, the ndian !anks &ssociation 6 !&7 A formulated a 2KS package for the 1S!s, which was approved by the $inance ministry.

Though S! promoted the 2KS as a H5olden Jandshake ,-its employee unions perceived it to be a retrenchment scheme. They said that the 2KS was completely unnecessary, and that the real problem,

which plagued the bank were 31&s+. The unions argued that the 2KS might force the closure of rural branches due to acute manpower shortage. This was expected to affect S! -s aim to improve economic conditions by providing necessary financial assistance to rural areas.

pg. 48

Loan Syndication
The unions also alleged that the 2KS decision was taken without proper manpower planning. n $ebruary A..(, the S! issued a directive altering the eligibility criteria for 2KS for the officers by stating that only those officers who had crossed the age of BB would be granted 2KS. %onse?uently, applications of around (A,... officers were rejected. The officers who were denied the chance to opt for the 2KS formed an association C S! 2KS optee Officers-&ssociation to oppose this S! directive. The association claimed that the management was adopting discriminatory policies in granting the 2KS. The average estimated cost per head for implementation of 2KS for S! and its seven associated banks worked out to Ks ..IB million and Ks ..B* million respectively. &s a result of the 2KS, S! -s net profit decreased from Ks AB billion in ()))'.. to Ks (I billion in A...'.(.

Bac!'round $ote:
The S! was formed through an &ct of 1arliament in ()BB by taking over the mperial !ank. The S! group consisted of seven associate banks<

Q State !ank of Jyderabad Q State !ank of ndore Q State !ank of 0ysore Q State !ank of 1atiala Q State !ank of Saurashtra

pg. 49

Loan Syndication
Q State !ank of Travancore Q State !ank of !ikaner D Maipur The S! was the largest bank in ndia in terms of network of branches, revenues and workforce. t offered a wide range of services for both personal and corporate banking. The personal banking services included credit cards, housing loans, consumer loans, and insurance. $or corporate banking, S! offered infrastructure finance, cash management and loan syndication 9. Over the years, the bank became saddled with a large workforce and huge 31&s. &ccording to reports, staff costs in ()))'A... amounted to Ks 9.B billion as against Ks 9.( billion in ()),')). ncreased competition from the new private sector banks 631!s7 further added to S! -s problems. The 31!s had effectively leveraged technology to make up for their size. Though S! had ),... branches, a mere AAF of those 6()+B branches7 were connected through nternet. n contrast all of J8$%B !ank-s I( branches were connected. !y A..., S! -s net profit per employee was Ks ..9+ million while J8$%-s was Ks ..)I million, and S! -s 31& level was around *.(,F as against J8$%-s ..*+F 6Kefer Table 7. &nalysts remarked that the very factors that were once hailed as the strengths of S! ' reach, customer base and experience ' had become its problems.

TA, E:
0 CO120%#SO$ B3 433$ SB# 5 SO13 $2Bs

pg. 50

Loan Syndication
!&3G S! 4T !&3G %% !&3G 8! !&3G $20s6$3 0&)0$C3S *.(,F 2%OF# 1illion9 ..9+ ..)I ..I) ..*, (.A (.(B 23% 312LO733 8%s in

J8$% ..**F 9.*(F (.B+F

5T! ..,*F (.)BF

Source< www.bankersindia.com

Technological tools like &T0s and the nternet had changed banking dynamics. & large portion of the back'office staff had become redundant after the computerization of banks.

To protect its business and remain profitable, S! realized that it would have to reduce its cost of operations and increase its revenues from fee'based services.The 2KS implementation was a part of an over all cost cutting initiative.The 2KS package offered I. days-salary for every year of service or the salary to be drawn by the employee for the remaining period of service, whichever was less.

pg. 51

Loan Syndication
#hile B.F of the payment was to be paid immediately, the rest could be paid in cash or bonds. &n employee could avail the pension or provident fund as per the option exercised by the employee. The package was offered to the permanent staff who had put in (B years of service or were 9. years old as of 0arch +(, A....

he 2rotests:
The S! was shocked to see the unprecedented outcry against the 2KS from its employees. The unions claimed that the move would lead to acute shortage of manpower in the bank and that the bank-s decision was taken in haste with no proper manpower planning undertaken. They added that the 2KS would not be feasible as there was an acute shortage of officers 6estimated at about (....7 in the rural and semi'urban areas where the branches were not yet computerized. 0oreover, the unions alleged that the management was compelling employees to opt for the 2KS. They said that the threat of bringing down the retirement age from I. years to B, years was putting a lot of pressure on senior bank officials to opt for the scheme. n 8ecember A..., S! had formed a joint venture with the $rench insurance company %ardiff, for entering the life insurance business.

The unions ?uestioned the logic behind diversifying the business and cutting down the staff strength. They argued that this move would significantly increase workforce burden and, conse?uently, adversely affect customer service. n A..., S! had undertaken a large'scale clientele membership drive in some states to attract more customers.

pg. 52

Loan Syndication
The unions opined that the 2KS could prove to be counterproductive as the increased business might not be handled properly. Jowever, despite all the protests, S! received around +B,... applications for the 2KS. &nalysts pointed out that many bank employees opted for the 2KS due to the better employment prospects with the 31!s. S! had not anticipated such a huge response to the scheme. #hile the 2KS was mainly aimed at reducing the clerical staff and sub'staff, the maximum number of optees turned out to be from the officer cadre. The clerical staff was reluctant to go for the 2KS due to the low employment opportunities for them in the 31!s. &ccording to reports, the number of applications from officers stood at (),A)B, which meant that over ++ per cent of the total officers in the bank had sought 2KS $ollowing huge response to the 2KS from officer cadre, S! issued a circular stating that the management would relieve only those officer cadre applicants who had crossed the age of BB years. The bank also issued a circular barring treasury managers, forex dealers and a host of other specialized personnel, from seeking 2KS. =mployees who had not served rural terms were also barred from opting for the scheme. The 2KS was also not open to employees who were doctorates, 0!&-s, %hartered &ccountants, %ost D #orks accountants, postgraduates in computer applications. n another circular, S! mentioned that

any break in service 6i.e. leaves availed on a loss of pay basis7 would not be taken while calculating the service period. The bank also restricted the loan facilities to the personnel who had opted for the 2KS. f an employee wished to continue a housing loan

pg. 53

Loan Syndication
after accepting 2KS, he was asked to pay interest at the market rate. &fter these restrictions were introduced, only (+.9F of the officers were left eligible for 2KS instead of the earlier ++F. The conditions laid down by the management faced strong criticism from the officers who had opted for the 2KS, but who could not meet the prescribed criteria. They alleged that the bank was practicing discrimination in implementation of the scheme and that no other banks had implemented such policies and denied the opportunity of 2KS to officers who were willing to avail the scheme. 0edia reports also called S! -s decision to restrict the 2KS as arbitrary, discriminatory and belying the voluntary character of the scheme. 4nions argued that if the bank was so particular that only (.F of its staff leave under the 2KS, it could have closed the scheme immediately after the re?uired number of applications were received. The unions also argued that +B,... applications 6(9F of the total workforce7 could not be considered high when compared to the response received by other public sector banks such as Syndicate !ank 6AAF7 and 1unjab D Sind !ank 6()F7, where all the applications that were received were also accepted for 2KS. The officers who were denied the 2KS formed an action group in 0arch A..(. They claimed that S! had violated the guidelines of the 5overnment and the ndian !anks &ssociation. &ccording to the members of the group, any shortfall in the number of officers could easily be met by promoting suitable clerks. They also cited the example of Syndicate !ank, which promoted about (,... clerical staff to officer level. The group filed cases before Jigh %ourts in various parts of the country, challenging S! -s decisions. & delegation of 2KS' denied officers even met the $inance 0inister and also submitted a memorandum to the S! management.

pg. 54

Loan Syndication

he 2ost )%S &ays:

&ccording to reports, S! -s total staff strength was expected to come down to around A,..,... by 0arch A..( from the pre'2KS level of A,++,... 6Kefer Table 7. #ith an average of B... employees retiring each year, analysts regarded 2KS as an unwise move. !y Mune A..(, S! had relieved over A(,... employees through the 2KS. t was reported that another ,,... employees were to be relieved after they attained the retirement age by the end of A..(. &nalysts felt that this would lead to a tremendous increase in the workload on the existing workforce. &ccording to industry watchers, by A.(., the entire S! staff recruited between mid ()I. and (),. would retire. &s a result, S! would not have sufficient manpower to manage over )... of its branches. &nother major hurdle was the 5overnment-s proposal to scrap the !anking Service Kecruitment !oard 6!SK!7I as the bank lacked expertise in recruitment procedures.

TA, E:
C:0$,3 #$ SB#.s S 0FF S %3$, : ;"-/;-/" Officers %lerical BA,BB, (.+,))+ ;"-/;-// B),9*9 ((B,9A9 < chan'e 6((.I+F7 6).).F7

pg. 55

Loan Syndication
Subordinate Total B+,*A) A(.,A,. B,,B+B A++,9++ 6,.A(F7 6).)AF7

Source< www.indiainfoline.com

n the post'2KS scenario, S! planned to merge 99. loss' making branches and announced redeploy additional administrative manpower 6resulting from the merger of loss'making branches7 to frontline banking jobs. S! also planned to reduce its regional offices from (. to ( or A in each circle. n &ugust A..(, it was reported that a single officer had to take charge of + or 9 branches as the daily concurrent audit * got affected. 8epartments like internal audit, concurrent audit, monitoring, inspection of borrowals had hardly any staff, according to reports. t was reported that employees working in branches that had a high workload went on work'to'rule agitation, blaming the 2KS for their problems. &nalysts felt that S! would have to take serious steps to reorient its JK8 policy to restore employee confidence and retain its talented personnel. S! had many strong organizational strengths and an excellent training system, but due to weak JK policies, it had lost its experts to its competitors.

The employees of almost all the new generation private sector banks were former employees of S! . The bank-s well'defined promotion policy was systematically flouted by the framers themselves and, as a result, employees with good track records were fre?uently sidelined. 0any analysts felt that S! was not able to realize the critical importance of recognizing

pg. 56

Loan Syndication
inherent merit and rewarding the performers. The above factors were cited as the major reasons for the success of 2KS in the officer cadres, who were reported to be demoralized and de'motivated. The arbitrariness and insensitivity at the corporate level had dealt a severe blow to the employees of the organization. #hat remained to be seen was whether S! would be able to reorganize its JK8 policy and retain its talented personnel.

pg. 57