A syndicated loan is one in which two or more banks (the syndicate of lenders) contract with a borrower to provide loan on common terms and conditions governed by a common document or set of documents. Interest on syndicated loans accrues at a variable rate rather than a fixed rate, which is more usually found in the securities markets. This variable, or floating, rate of interest is reset periodically, the periods most frequently used are one, two, three and six months, and are usually selected by the borrower. The borrower usually mandates one or more banks to act a arranger and one member of the bank group is normally appointed to act as the agent bank for the syndicate. It is the role of this bank to coordinate all negotiations, payments and administration between the parties once the contract has been executed. The mandated arrangers prepare information material, invite other banks to provide capital, and communicate with the borrower on behalf of all the participating capital providers. Additionally, the mandated arrangers usually provide a larger amount of capital than the other banks. One of the participating banks, most likely a mandated arranger, will act as the facility agent of the transaction with the responsibility to manage the loan during its lifetime (Armstrong, 2003). Mandated arrangers are often referred to as top-tier banks and their title in loan transactions is currently Mandated Lead Arranger (MLA).
It is a multi-bank transaction with each bank acting on a several basis – each bank acts as underwriter and/or lender, on its own without responsibility for the other banks in the syndicate. If a bank fails to honor its obligations as a member of a bank syndicate, the other syndicate banks have no legal duty to satisfy these obligations on that behalf.
Syndication means joint financing by more than one bank to the same borrower against a common terms and conditions governed by a common document
As per Encyclopedia of Banking and Finance (EBF), “Syndication” means a temporary association of parties for financing and execution of some specific business purpose.
EBF also defines “Syndicated Loan ”as loans extended by multiple banks where the overall credit involved exceeds an individual lender’s legal lending or other limits.
Syndicated loan is made available by a group of FIs in predefined proportions under the same credit facility following common loan documentation formalities. (project Finance and Loan Syndication).
Loan syndication is different from club financing (where many banks finance a single borrower and Agent) in terms of deal origination, mechanism, documentation, disbursement, monitoring, management, etc. Essential Characteristics: (i)single borrower, (ii)more than one lender, (iii)common visit this page loan security documentation.
The agent bank will usually consult with the borrower in such circumstances and attempt to find a wiling replacement bank or banks – although it is not obliged to do so
- Equity components ranged between 20% and 35%
- Participants in large syndications average 13 banks
- Tenure tends to be 5 to 7 years
- Interest rates tend to be between 12% and 14% ( i.e. base of around 8% + margin)
- All loans have been denominated in local currency (Bangladesh taka)
- There were no GoB Guarantees or Multilater
A 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. “No two syndications are identical,” wrote Bunn. Syndicated loan involves many banks, each member bank holds different titles: lead bank, arranging bank, underwriting bank, allied bank ,senior manager bank, manager bank or participating bank. Syndicated loan includes three types of member banks from functional perspective: