Syndicated Loans: Financing the Future

Syndicated loans well exceed other forms of credit extended to enterprise businesses with large financing requirements. The market for syndicated loans has been consistently growing at nearly a 15% pace between 2020 and 2021.¹ However, the ripple effects of the war in Ukraine, U.S. interest rate increases from the Federal Reserve, and high inflation are creating uncertainty in the syndicated loan environment. Attain perspective on the current state of syndicated loans and learn tips for approaching your next loan with a broader view.

Syndicated Loans: Role of the “Loan Arranger”

At times, large businesses or corporations, project entities, or even sovereign entities require extensive credit facilities or loans that are simply too large for a single lending institution. Such facilities need several banks or institutional investors to support a common credit facility request or funding opportunity, known as a “syndicated loan.”

A loan arranger brings together a group of banks and institutional investors, known as a syndicate, to cover the financing needed for a particular business asset or project. Institutional investors can be of diverse origin, including insurance providers, credit institutions, pension funds, or hedge funds.

A single bank or investor (often the first contacted) will typically become the loan arranger for the syndicated loan. Essentially acting as large, commercial loan brokers, the loan arranger tackles a sophisticated loan structure across multiple lenders to secure a borrower’s requested financing. The arranger may become the underwriter for the loan (performing extensive due diligence on the loan application) and take a larger share of the loan. The arranger may also assume administrative tasks associated with the loan or assign these tasks to another participant.

Syndicated loans can be structured in a variety of ways, to include credit lines, fixed amounts, or both.

Syndicated loans can be structured in various ways, including credit lines, fixed amounts, or both. Interest rates may be fixed or may rely on a shared industry standard such as the Secured Overnight Funding Rate (SOFR) or other common rates as companies transition away from the London Interbank Offered Rate (LIBOR).

Working with a loan arranger can simplify the process for the borrower. No separate applications are required at each institution to secure financing, and a single point of contact can ease loan administration. Participating banks and investors also benefit from significantly reduced credit risk compared with the entire loan’s exposure placed with a single lender. The risk of default can be high with syndicated loans, particularly in the case of leveraged buyouts or sovereign entities.

Syndicated Loans: Loan Administration

With an inherently higher risk of insolvency, syndicated loans are more administratively complex and require more attention and care. While working with an administrative agent can ease the administrative burden of managing multiple loans across lending entities, syndicate participants often find these tasks distracting from their core competencies.

Independent, third-party loan agents who focus solely on loan administration can further streamline the management of these highly complex credit facilities and reduce risks associated with non-compliance, bankruptcy law, claims, and cross-border considerations. Syndicated loans also require timely and effective communications across the portfolio of lenders and with the borrower to ensure accurate payments, communications, and responsiveness.

For more information about syndicated loans and how we can professionally support your next syndicated loan, please contact us.

Footnotes

¹Global Lending Market Report 2021: COVID-19 Impact and Recovery to 2030 - ResearchAndMarkets.com