Syndicated Loans

What is a Syndicate Loan?


A syndicated loan, also known as a syndicated bank facility, is created by a conglomerate of banks who pool their funds together to offer a loan to a borrower.  Syndicate deals often arise when a borrower needs to raise large sums of cash in a expeditious timeframe.  Typically, lenders do not want to take on large amounts of risk and will involve multiple banks in the deal to limit their exposure to credit defaults.  There is only one loan agreement between the syndicate and the borrower; however, each bank within the syndicate has a claim to a pro-rata portion of the loan and will assume the risk associated with that portion as well.

How is a Syndicate Loan Structured?


Within a syndicate deal, there are two main groups of lenders.  There is a senior group of lenders which serve as the "arrangers" or lead managers of the deal.  This group of banks is tasked with structuring the loan, funding it, underwriting it, and marketing it to other banks.  Once the loan origination process completes, one of the lead banks will take responsibility for performing administrative duties and managing the relationship between the borrower and the syndicate.

The second group of banks can be referred to as the "junior" group.  They are only responsible for providing funding.  If the lead banks cannot generate enough support for the loan (through the junior syndicates), the loan may not be fully dispersed.

Syndicate loans can be fixed rate or variable rate loans.  The variable rate loans are typically priced at a spread above a benchmark index such as LIBOR but even that will vary based on the credit quality of the borrower.  Many times, the loan is structured to be performance based.  This means that the spreads will narrow or widen on the loan as the companies performance increases or decreases. 
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