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Syndicated loans are commonly used for companies with large financing requirements. These types of loans disperse risk among many lenders, rather than just one or two. Macroeconomic issues over the past couple of years have created volatility in the market and retrenchment from regional banks has created competition from nonbank lenders. Still, syndicated loans are essential financing tools. Gain perspective on the role of syndicated loans and how to approach your next loan within this context.
Syndicated Financing: Funding the Future
Syndicated Loans: Role of the Arranger
When several lenders are providing financing for a borrower, a single point of contact to run the transaction is essential to guarantee a smooth process.
Syndicated Loans: Loan Administration
Administrative agents handle the day-to-day duties and communications between lenders and the borrower, reducing repetition and ensuring a streamlined approach.
Syndicated Loans: Role of the Arranger
Corporations and businesses rely on large financings for buyouts, general corporate purposes and refinancings. When the amount a borrower requires is too great for a single entity to absorb, several banks and institutions unite and provide a syndicated loan.
One bank serves as the loan arranger, takes charge, and spearheads the financing. In this role, the lead will divvy up portions of the loan to institutions that will hold the loan. This group of lenders is known as the syndicate.
The arranger is often the underwriter and may hold a larger portion of the debt. The arranger may also perform the administrative agent role or assign that to another entity, either in the syndicate or a third party.
Amid volatility in the market in recent years, some banks have had to reduce balance sheet risk and were unable to lend in size to sub-investment grade borrowers. This provided an entrance for direct lenders to extend loans to borrowers. These nonbank lenders hold the loans rather than sell them off to institutional buyers. Even with the emergence of direct lenders, the lack of liquidity in private credit and higher cost of borrowing in that market will ensure a place for the syndicated loan market in corporate financings.
Loan structures vary in seniority with senior debt typically having a higher recovery in the case of a workout or default. Most loans have floating rates and use the Secured Overnight Funding Rate (SOFR) as a base rate. Often, a borrower pays the base rate plus a spread. The loan may be syndicated out via assignment to other institutional lenders - such as hedge funds, pension funds, and insurance providers - after the transaction has closed. Learn more about the transition to SOFR in our report, Life After LIBOR: recommendations for an Orderly Transition.
Loan arrangers facilitate the financing process for borrowers by minimizing the work in securing lenders. Banks and investors also benefit from reduced credit risk by sharing exposure to the loan with other lenders.
Syndicated Loans: Loan Administration
Syndicated loans are complex and may be risky given the credit quality of borrowers tapping the syndicated loan market may be below investment grade. Loan agreements must detail all of the stipulations and requirements between both arranging banks and the borrower.
An administrative agent performs the administrative duties laid out in the credit agreement. The agent is also the communication hub between the borrower and the syndicate. Relying on a single agent eases the burden of these tasks, streamlines the process, and creates efficiency.
A third-party agent who does not have a monetary interest in the transaction adds another level of benefit. The third-party agent is focused solely on administering the loan and does not make discretionary decisions that may be influenced by their lending position in the deal.
Vitality of Syndicated Loans
Syndicated loans are a vital source of financing for corporate borrowers, and arrangers and administrative agents play an equally vital role in executing successful transactions. Acquisitions, buyouts, refinancings, and funding for corporate purposes will always be required to keep the economy moving. Arrangers and administrative agents are there to ensure a smooth process.
Renee Kuhl
Managing Director, Loan Agency tel: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.