Syndicated loan
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers.
The syndicated loan market is the dominant way for large corporations in the U.S. and Europe to receive loans from banks and other institutional financial capital providers. Financial law often regulates the industry. The U.S. market originated with the large leveraged buyout loans of the mid-1980s, and Europe's market blossomed with the launch of the euro in 1999.
At the most basic level, arrangers serve the investment-banking role of raising investor funding for a business in need of capital. In this context the business is often referred to as an “issuer”, because in return for the loan it issues debentures.
The issuer pays the arranger a fee for arranging the deal. Fees increase with the complexity and risk of the loan: the most remunerative loans are therefore those arranged for “leveraged borrowers” — issuers whose credit ratings are speculative grade because they are paying spreads sufficient to attract the interest of non-bank, term-loan investors. The threshold spread varies depending on market conditions.
Loan market overview
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 U.S. than in Europe. The U.S. has a capital market where pricing is linked to credit quality and institutional investor appetite. In Europe, although institutional investors have increased their market presence over the past decade, banks remain a key part of the market. Consequently, pricing is not fully driven by capital market forces.In the U.S., market flex language drives initial pricing levels. Before 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. After this market read, the arrangers will launch the deal at a spread and fee that it thinks will clear the market. Once the pricing, or the initial spread over a base rate, was set, it was largely fixed, except in the most extreme cases. If the loans were undersubscribed, the arrangers could very well be left above their desired hold level. Since the 1998 Russian financial crisis roiled the market, however, arrangers have adopted market-flex contractual 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. This is now a standard feature of syndicated loan commitment letters.
As a result of market flex, loan syndication functions as a book-building exercise, in bond-market parlance. A loan is originally launched to market at a target spread or, as was increasingly common by 2008 with a range of spreads referred to as price talk. Investors then will make commitments that in many cases are tiered by the spread. For example, an account may put in for $25 million at LIBOR+275 or $15 million at LIBOR+250. At the end of the process, the arranger will total up the commitments and then make a call on where to price the paper. Following the example above, if the paper is vastly oversubscribed at LIBOR+250, the arranger may slice the spread further. Conversely, if it is undersubscribed even at LIBOR+275, then the arranger will be forced to raise the spread to bring more money to the table.
In Europe, banks have historically dominated the debt markets because of the intrinsically regional nature of the arena. Regional banks have traditionally funded local and regional enterprises because they are familiar with regional issuers and can fund the local currency. Since the Eurozone was formed in 1998, the growth of the European leveraged loan market has been fuelled by the efficiency provided by this single currency as well as an overall growth in merger & acquisition activity, particularly leveraged buyouts due to private equity activity. Regional barriers have fallen, economies have grown and the euro has helped to bridge currency gaps.
As a result, in Europe, 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 European institutional investors and U.S. institutional investors, resulting in the creation of a loan market that crosses the Atlantic.
The European market has taken advantage of many of the lessons from the U.S. market, while maintaining its regional diversity. In Europe, the regional diversity allows banks to maintain a significant lending influence and fosters private equity's dominance in the market.
Types of syndications
Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.Underwritten deal
An underwritten deal is one for which the arrangers guarantee the entire commitment, then syndicate the loan. If 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. If 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.Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require 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
A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close — or may need significant adjustments to its interest rate or credit rating to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. However, since the late 1990s, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.Club deal
A club deal is a smaller loan — usually $25‒100 million, but as high as $150 million — that is premarketed to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.The syndication process
As a syndicated loan is a collection of bilateral loans between a borrower and several banks, the structure of the transaction is to isolate each bank's interest whilst maximising the collective efficiency of monitoring and enforcement of a single lender. The essence is to make loans on similar terms to make a bundle of loans into a single agreement. This draws upon Loan Market Association documents. Correspondingly, three key actors operate within a syndicated lending:- Arranger
- Agent
- Trustee
The distinction in the lending agreements, and use of the three aforementioned actors is primarily to avoid the creation of a partnership, avoid lenders from inadvertently acting as guarantors to one another — or to prevent Set-off. The borrower is sometimes given a “Yank the bank” power to force a transfer of a lenders interest in repayment if the lender does not consent to a waiver or amendment. Lenders are traditionally limited in their decision-making by overlapping clauses requiring voting and collective decision-making. This acts as a disincentive for individual lenders to act in their own interests over the collective group. It has been suggested that the historical cooperation within the London loan market helped produce efficiency insolvency work-outs through the London Approach.
Lending Terms
There are several common types of lending terms, including implied terms in syndicated lending that affect the operation and coordination of lending behaviour.- Snooze-you-lose provision where lenders are required to submit their votes, these are contractual discretions which allow. These were found within several cases which regard terms relating to contractual discretions which must be exercised for the purposes which they are conferred.
- Good Faith.
Participants