Uncategorized

Syndicated loan – what’s new?

A syndicated loan is made available to a lender in collaboration with several banks, the consortium. It is also known as a metacredit or syndicated loan. With this type of loan, the borrower requires a very high loan amount, as a rule the lower limit is between thirty and fifty million dollar. These sums would overwhelm a single bank because they are too high a risk.

Syndicated loans usually do not play a role in the private sector, such as typically private mortgage lending or similar loans.

Rather, this form of loan serves to finance large-scale projects and investments, such as a shopping center, football stadium or a closed real estate fund.

Expiry of a syndicated loan

Expiry of a syndicated loan

The borrower takes out loans from several banks to finance a project. For this purpose, the borrower first turns to a bank of his trust, as with any other financing. However, it is important to choose a bank that has a strong market position. After the borrower described his project, the bank proposed a syndicated loan to finance unusually high sums. For this purpose, several credit institutions form a consortium, a merger, in the form of a (company under civil law).

As with an ordinary, all banks are jointly and severally liable. The task of customer contact and organization is carried out by only one bank, the lead manager. This is usually the first bank to be contacted, also known internationally as a “Mandated Lead Arranger”, or MLA for short. This bank is also the one that takes over all further steps, i.e. it makes the offer to other financial institutions to participate. Usually, banks with existing business relationships are of course initially used, but the consortium also offers banks the opportunity to establish new business relationships.

Costs

Costs

The consortium also takes on the terms of the loan terms with the borrower. There are hardly any differences in terms of interest rates compared to other types of credit.

As with other financing, the creditworthiness of a borrower plays the greatest role. If rating agencies have given the company a high credit rating, the syndicated loan is often granted at an effective interest rate that is only slightly above the Euribor. The Euribor is the interest rate at which the banks borrow money from one another. If a company’s creditworthiness is poorer, the interest rate will also be correspondingly higher since the banks have to factor in higher risks.

The syndicated loan agreement

The syndicated loan agreement

The syndicated loan agreement is concluded between the borrower and the consortium. Like an ordinary loan agreement, this agreement regulates the loan amount, the repayment modalities and the consequences for possible violations of the contractual terms. The joint loan agreement also excludes the termination of an individual consortium member. This provides the borrower with the security that the entire financing on the part of the banks cannot be jeopardized.

The consortium only makes all important decisions together. In addition to the correspondence and the organization, the repayment also runs through the lead manager. The consortium will be dissolved as soon as the executing bank is able to record the complete repayment of the loan.

About the author

Huey Nguyen

View all posts

Leave a Reply

Your email address will not be published. Required fields are marked *