Bilateral Facility: How It Differs from a Syndicated Loan

In a bilateral facility, the bank that negotiates the loan is the bank that holds it. It does its own diligence, sets its own conditions and prices the risk to its own view. There is no arranger selling the loan down, no agent passing notices between lenders, and no majority lenders clause, because there is only one lender. When the borrower needs something changed, it talks to its banker, and the answer comes from that bank's credit process.

That is why most lending to small and mid-sized businesses is bilateral. A loan of a few million dollars does not need several balance sheets, and the cost of documenting and administering a shared facility would outweigh any benefit. Lending is shared when one bank cannot or will not hold it all: because it is large, because it would breach the bank's own limit on a single name or a sector, or because the borrower wants more than one bank's commitment.

A bilateral facility is usually documented on the bank's standard terms: a facility letter or offer setting out the limit, price, term, covenants and conditions, with the bank's general business lending terms incorporated by reference. Security is granted directly to the bank, without a security trustee. Larger bilateral facilities may be negotiated further, but the starting point is the bank's form, not a market-standard agreement drafted for several lenders.

A borrower with more than one bank, each lending bilaterally, has as many sets of terms as banks. Each defines debt, earnings and the covenants in its own way, each sets its own maturity, and each takes its own security unless the banks agree to share it. Larger borrowers bring them together in one of two ways. A common terms deed, a form used in Australian and New Zealand corporate lending, keeps each loan bilateral but puts the definitions, undertakings and covenants into one document, often a deed poll the borrower gives for the benefit of every lender, which each facility agreement then incorporates; where the loans are secured, a security trustee can hold the security for all of them. The other route is a club or syndicated facility.

A regional bus operator, constructed for this page, has built up three bilateral facilities over a decade: a US$20m term loan from Bank 1, a US$12m revolver from Bank 2 and an US$8m equipment line from Bank 3. Total debt is US$40m, cash US$4m and annual interest US$2.4m. This year's EBITDA is US$13m, which includes a US$1m gain on selling a depot. Each bank wrote its covenants when it lent, and none compared them. The levels are the example's.

The same business, on the same day, breaches one bank's covenant and passes the other two, because the definitions differ. The breach is an event of default under Bank 1's facility, and the cross-default clauses in Banks 2 and 3 may turn it into a default under theirs too. The operator now negotiates a waiver with Bank 1, which may want a fee and a higher margin, while asking the other two to confirm they will not act on a breach of a covenant they did not set.

At the next renewal, the operator can align the three: one definition of debt and earnings, one covenant set, maturities moved to the same date. That is the common terms route. Or it can refinance into a club facility of the same three banks, which settles the drift for good at the price of putting future waivers to a vote.

The difference is who decides and on whose information. In a club facility, a few banks with their own relationships with the borrower lend on one negotiated set of terms; in a syndicated loan, arrangers agree the terms and sell shares to a wider group, which relies on the arrangers' information. In both, an agent administers the loan, a security trustee holds any security, and waivers and amendments go to a vote, with some matters needing every lender.

A bilateral lender gives up the comfort of shared risk and gains control. It sees everything first, and in a workout it decides alone when to waive, reprice, enforce or wait, with no intercreditor terms to negotiate. A participant in a syndicate holds a smaller exposure but can be outvoted on the decision that matters most to it. For a borrower, the same trade appears from the other side: one bank is quick to deal with, but one bank's change of appetite is the whole of its funding.

DEFINED IN ONE PARAGRAPH → · PRACTISE: CLUB AGAINST BILATERAL → · MAJORITY LENDERS →

For the lending bank, a bilateral facility puts the whole judgment on its own file. The credit paper has no arranger's information memorandum to lean on and no co-lenders whose participation signals comfort. It also has to fit the bank's own limits: a borrower that grows beyond what one bank will hold on a single name is the borrower that brings in a second bank, and that is when the drift in the example begins.

For the borrower, the reading is about concentration and consistency. With one bank, the relationship is the funding plan, so the refinancing work starts well before maturity. With several, every renewal is a chance to bring definitions, covenant levels and dates back into line, before a bad year shows that they differ.

READING YOUR FACILITY LETTER → · LOAN COVENANTS, EXPLAINED →