Challenging market times can often lead to distressed credit and increasing demand for balance sheet liquidity. Knowing how to administer large credit facilities can be invaluable for lenders. An independent, conflict-free loan agency partner is often your best choice to help you manage commercial loans.
There are many reasons that businesses of all sizes seek additional capital, from increased cash flows to support operational enhancements, to geographical expansion, or riding through difficult market times. A borrower’s approach to choosing a loan structure can depend on the desired loan amount, the relative size of their business, current financial health, and other factors. Lenders assess a borrower’s profile and the risk the requested loan amount introduces to their portfolio. Below, the team of loan agency professionals at SRS Acquiom offer a perspective on bilateral and syndicated loans as well as tips for approaching loan management efficiently.
What is a Bilateral Loan?
A bilateral loan is a form of credit arranged between a borrower and a single lender: by definition, there are only two parties to the loan. The credit terms established by the lending enterprise are usually associated with lower complexity for lenders and are less challenging to administer.
Borrowers can typically anticipate scheduled interest rate repayments over a specified period. Bilateral loans typically are traditional bank loans and, with their simple structure, are often used by smaller businesses.
How Lenders Assess Borrower Viability for Bilateral Loans
Commercial lenders need to have confidence that borrowers will predictably repay a loan to ensure their own regulatory compliance, business continuity, and growth. They will typically review several factors when establishing a commercial loan and the interest rate assessed. Just as with consumer loans, commercial lenders try to get a complete picture when determining the credit worthiness of a borrower, including the loan amount requested, the borrower’s credit history, personal and business reputation, and other factors. A borrower’s credit scores and a track record of consistent, on-time repayments with prior loans come into play.
If the loan is a sizeable or there are factors that introduce risk of repayment by the borrower, the lender will often require collateral pledged against the loan. The collateral required often will be of sufficient scope and value to meet or exceed the requirements of the loan. Should a borrower default on the loan, title to the pledged collateral can be awarded to the lender (or syndicate, as covered below) to meet the loan obligations.
What is a Syndicated Loan?
Most frequently used by larger commercial enterprises, syndicated loans give borrowers access to more capital than a single lender is willing or able to provide. A group of lenders (known as a “syndicate”)—often comprised of investment banks, institutional investors, hedge funds, and other financial entities—each contributes a portion of the borrower’s requested funds.
Both bilateral and syndicated loans are governed by the negotiated terms of a credit agreement between the borrower, lender(s), agents, and other loan parties. There is a single loan agreement that documents a syndicated loan, but each syndicate member has a separate claim on the borrower of funds.
Syndicated Loans Offer Borrowers Flexible Funds
A syndicated loan can create a streamlined, more efficient pathway to a greater pool of funds for the borrower: while negotiating with only one lender, the borrower has access to funds from several sources with options in loan structures and payment terms. However, borrowers should anticipate rigorous due diligence on its business, and with multiple lenders involved, syndicated loans can be expensive and complex to manage.
Syndicated Loans Disperse Risk for Lenders
Syndicated loans offer a key advantage to lenders because more than one lender shares the risk of the outstanding loan proceeds. Should a borrower exceed a lender’s risk tolerance, additional lenders can be engaged to support the loan. Lenders view participation in the syndicate as a positive event as they can extend its customer base at a lower cost per customer acquisition and assess associated fees without the larger risk associated with a traditional loan. Syndicated loans tend to be complex to manage for the loan arranger and syndicate members alike with highly diversified funding sources, the perfection of collateral, and obligations that can vary between lenders. Investment bankers or professional loan advisors typically arrange these types of loans.
Key Roles in a Syndicated Loan
Knowing the key roles in a syndicated loan can assist with context:
- Loan Arranger
The bank or financial institution that the borrower first approaches will often act as the “loan arranger” with other lenders, should the amount be too large or too risky to support on its own. As the loan amount is determined and due diligence on the borrower is completed, the loan arranger will seek additional lenders to participate in the syndicate.
The loan agent is the intermediary between the borrowers and the loan syndicate and supports the loan with professional administrative management. The agent bears no fiduciary responsibility toward the loan, but instead ensures that the loan syndicate and the borrower can fully exercise their rights according to the terms of the credit facility.
Syndicated and Complex Bilateral Loans: Independent, Third-Party Professional Loan Agency Can Help
When lenders are involved with complex credit structures or rate mechanisms, in-house resources can be easily overwhelmed by daunting details. In such loan situations, lenders can find their resources fully engaged in credit management instead of their core, vital business roles.
Independent loan agency services can make a genuine difference to lenders and borrowers by introducing convenience and efficiency in managing complex loans. An independent loan agent acts as a single point of contact between the borrower and lending group for all questions or issues associated with the credit facility and handles all day-to-day matters. Further, the loan agent performs functions associated with maintaining the register, such as processing lender trades (assignments), making payments and preparing notices, collecting and distributing borrower compliance documentation, and much more. If disputes arise, the loan agent consults the lender or syndicated lender group and defers to its direction.
Anticipating the challenges of complex bilateral and syndicated loans can be overwhelming. The team at SRS Acquiom routinely supports lenders and borrowers with independent and bias-free professional loan agency services on a full spectrum of loan transactions. Our systems are time and stress-tested to ensure that bilateral and syndicated loans are managed smoothly for all parties involved. Consider professional loan agency support for your next commercial loan.
Managing Director, Loan Agency 612.509.2323
Renee is the managing director for the Loan Agency Group for SRS Acquiom. As an accomplished financial industry professional, she leads the loan agency product.
Before joining SRS Acquiom, Renee served as an administrative vice president at Wilmington Trust, N.A., most recently leading the loan agency and restructuring products. In addition to her 10 years at Wilmington Trust, she also worked for Wells Fargo Bank, N.A. in the corporate trust and shareholder services departments.
Renee has a Juris Doctorate from Mitchell Hamline School of Law in Minnesota, and a B.A. in political science and history from Azusa Pacific University in Azusa, California.