Syndicated loan

General Provisions

A syndicated loan is a financial transaction used to issue a large loan to clients. The purposes of obtaining funds can vary: business development, carrying out specific operations, or diversifying the company's core activities.

If a client needs to be provided with a large amount, lenders are allowed to unite into an integral structure called a syndicate. Next, a multilateral agreement is created to implement the disbursement process, which outlines the degree of the borrower's legal liability to each participating entity.

The essence of a syndicated loan

The point is that the organization acting as the borrower simultaneously receives a large sum provided in various shares by multiple lenders on a fee-paying basis, subject to repayment within specified deadlines. The implementation terms of such agreements are set depending on the purposes of expenditure and can range from several months to 10 years or more. Throughout the term of the agreement, lenders earn on a fixed or floating loan rate paid by the borrower on a regular basis. The borrower themselves gets the opportunity to dispose of the funds in their own interests. 

The specifics of this type of agreement involve restricting the list of applicants who can expect their request to be satisfied. A key condition necessary to obtain the loan is the company's stability and solvency in accordance with an international credit rating. 

Obtaining the loan requires the conclusion of an independent auditor. This leads to additional costs. A positive history of interaction with credit institutions increases the likelihood of receiving a positive response to a loan request.   

What types of syndicated loans exist

A syndicated loan is a loan provided by two or more banks on identical terms set out in an official agreement. Most often, such a loan is taken when planning to take a business to the international level or in the event of plans and intentions focused on infrastructure transformations. The minimum transaction amount for such a plan is 10 million USD. 

The profit received by banks under the loan agreement is distributed evenly among all participants. Consequently, if a lender provided 20% of the total loan amount, it will receive the same proportion of the profit. The sharing of risks for such a transaction is equal for all lenders. The possibility of obtaining a preferential right to recover unreturned funds from the borrower for one single bank is excluded. 

Administration and servicing functions are performed by one of the lenders. They are assigned the following responsibilities: 

• making the transfer in favor of the loan recipient; 
• accepting regular payments according to the designated schedule; 
• notifying all interested transaction participants of operations and changes. 

One-time and regular agency fees are designated to cover the aforementioned related costs. 

According to the classification presented within Central Bank of Russia Instruction No. 139-I of 2012, there are three main forms of a syndicated loan:

1. Jointly initiated. Provides for the collective determination of loan parameters and differentiated provision of funds. In this case, the agent bank receives a commission for services in drafting the general agreement. 
2. Individually initiated. One bank is designated as the lender, from which the requirements under the agreement are subsequently transferred to the syndicate participants. 
3. Without shares. The transaction is concluded between a single bank and the borrower. Next, financial legal relations are re-registered between the bank (the primary borrower) and third parties. Third-party credit institutions are required to allocate funds no later than the designated transfer date. They will receive their payouts after subsequent transactions are processed. 

They choose one of the options depending on the agreements reached between the parties.   

Why a syndicated loan is needed

The need to obtain large loans may arise for companies with substantial cash turnover. This need arises from the need for further development to enter the global market. Financing requires the mandatory participation of several financial institutions acting as lenders. This allows the borrower to avoid having to arrange separate transactions with different banks. 

An undoubted advantage for lenders is the reduction of potential risks. Any company can go bankrupt, and in that case, not only probable profit but also possible losses are shared among several companies.

Lending features

A syndicated loan is a loan issued under an agreement involving several parties and implying the provision of a large sum. This practice is common worldwide but is not very popular in Russia. The lack of demand is due to the obligations that companies applying for such loans incur. 

The special feature of arranging a syndicated loan is that the borrower has the right to form the syndicate of lenders independently, influence the transaction process, and borrow money on more favorable terms.   

Loan terms

You can apply for a syndicated loan in two ways: 

1. Select potential lenders independently, form a loan syndicate, and then negotiate the transaction. 
2. Delegate all obligations to a specific agent bank. 

The requirements imposed on borrowers when reviewing syndicated loan applications are as strict as possible. Lenders will consider reputation, review financial statements and the company's management structure. Other criteria may also be significant. In some cases, a third-party guarantee or collateral may be required to arrange the loan. 

The readiness of credit institutions to provide a syndicated loan means moving on to discussing the specific parameters of the transaction. It is important to keep in mind that such transactions are exclusively individual in nature. The company can influence the duration, loan amount, and terms of its provision. 

Pros and cons

It is easier to agree on providing a large sum if the obligations are shared among several lenders. The parameters of the transaction remain the same for all participants, so there is no need to calculate differences in rates. 

The list of advantages of such loans includes: 

• the ability to obtain a loan without large associated costs; 
• no need to coordinate individual loan parameters; 
• a reduction in the number of formal reporting obligations; 
• flexibility of terms and interest rates; 
• the ability to take out a loan on favorable terms; 
• the public nature of the transaction, which benefits all participants. 

It is also important to consider the drawbacks: 

1. Commission costs for the bank acting as the arranger. The fee can reach 2% of the loan amount. 
2. A reservation fee charged on funds not drawn by the borrower. 
3. An agency fee paid to the party servicing the agreement on an ongoing basis. 

Using a syndicated financing scheme is relevant for large enterprises that need additional funds to implement major projects. Through a proactive approach, one can achieve the most favorable terms, reduce the interest rate, and set optimal loan repayment periods. The main thing is to understand that servicing such transactions is quite expensive, so future budgeting needs to be planned as thoroughly as possible.

What a borrower should consider when arranging a syndicated loan

When considering this loan product, you need to pay attention to the following nuances: 

1. Members of the syndicate are not legally liable for the bad-faith actions committed by other parties to the agreement. 
2. Each borrower may make its own demands regarding the party applying for the loan. 
3. A decision by one member of the loan syndicate to withdraw from the relationship does not cancel the transaction until the number of participants becomes less than two.

A syndicated loan is a product needed by large businesses. Its main advantages are simplicity and favorable transaction terms that can be obtained. The loan also has downsides, such as high costs. The attractiveness of such a loan offer should be assessed individually.