Club Facility: How It Differs From a Syndicated Loan

A growing company reaches a point where the debt it needs is larger than its bank wants to hold in one name. A bank may be able to fund the amount and still decide it should not, because a single large exposure can do more harm than its margin is worth. The company might also prefer not to depend on one lender. A second and third bank that already provide accounts, foreign exchange or an earlier loan are the natural place to go, and a club puts them on one set of terms instead of several unmatched bilateral agreements with different covenants.

The Loan Market Association's guide says a club deal is usually a loan shown in advance to the borrower's relationship banks, put together by the borrower or with an arranger's help. No statute defines the term. It describes how the deal was assembled.

There is one facility agreement, often starting from a market association's form (the LMA's in the UK, the APLMA's in Australia) or from one bank's own paper, and then negotiated. Each bank commits a stated amount. Drawings are made across the banks in proportion to their commitments, and fees usually follow the same proportions.

One of the banks usually acts as agent. The agent passes notices and compliance certificates to the others and routes payments in both directions. It is generally not a decision-maker and will look to the majority lenders before using any discretion. If the club is secured, a security trustee commonly holds the security for all of them, so that a bank can leave or join without the security being taken again. Club banks may also provide overdrafts or guarantee lines alongside it, which the agreement may carve out of their commitments.

Two terms do most of the work between the banks. The obligations are several: each answers for its own share and no other's. And a sharing clause, found in many agreements, requires a bank that collects more than its proportion to pass the excess around.

A fuel distributor, constructed for this page like every figure in it, needs an US$80m revolving facility. Its main bank will not hold more than US$30m in one name, so it and three others form a club. Commitments, fee and drawings are the example's.

Every bank earns 0.80% on what it holds. If one arranger had underwritten the whole amount for a fee of 1.00%, kept US$15m and paid participants 0.50% on the US$65m it placed, the arithmetic would differ:

The extra is what an underwriter earns for the risk of being left holding the unsold amount. A club has no such risk to pay for, and no one to sell it to. Now two events. In the first, Bank D cannot fund its US$6m on a drawing date. The other banks have no duty to cover it, so the distributor receives US$42m and has a problem with its supplier payment. In the second, separately and with all US$48m drawn, the distributor has defaulted and Bank A sets off US$4m from the deposit account it holds. Under a sharing clause it does not keep that:

Holding the deposit account gave Bank A speed, and the clause takes away most of the benefit. That is the bargain each bank made in order to lend beside the others. How a covenant waiver is then counted among such holdings is worked on the majority lenders page.

A syndicated loan and a club can use nearly the same document. The differences lie in who is lending and why. In an underwritten syndication the arrangers commit the whole amount and then sell down, and in a best-efforts deal they commit part and seek others for the rest. Lenders may arrive who have not dealt with the borrower before, attracted by the fee and the name. In a club the banks are chosen in advance, usually because each has a relationship, and no sale is required for the deal to work.

A bilateral loan sits at the other end: one bank, one document. Moving to a club gives the borrower more capacity and less dependence on a single bank, and costs it the ability to fix a problem with one phone call. The bank's view changes too. Its exposure is smaller, but so is its say.

DEFINED IN ONE PARAGRAPH → · MAJORITY LENDERS → · CORPORATE VS COMMERCIAL BANKING →

Each bank's credit paper has to stand on its own. Agreements commonly record that a lender has made its own assessment and is not relying on the agent or arranger, so another bank's approval is not evidence for yours. The paper should say how much the bank holds, why that amount, and what happens if another bank's appetite changes at the next review. The club's first difficult quarter tends to show how far each bank's commitment to the name goes.

Exit is the other thing to read. A club has no active market behind it, and agreements commonly restrict transfers without the borrower's consent, particularly while no default is continuing. A bank that wants out may need the borrower's agreement as well as a buyer, and the other banks may have a view on who joins them even where the document gives them no veto. The ancillary business matters too. Accounts, foreign exchange and trade lines are often how a club bank earns a return on a thin margin, and how those are shared among the banks is often negotiated as hard as the loan.