Syndicated Loan: a Worked Example

Size is only part of the reason. A bank that could fund a loan by itself may still choose not to, because it limits how much of any one borrower it holds. Each bank sets its own single-name limit. In Australia and the UK regulators add an outer ceiling, generally 25% of Tier 1 capital for exposure to one counterparty or connected group. A borrower that needs more than a bank will hold has to find more banks.

Syndication lets it find them once. The lenders contract with the borrower on common terms in a common document. Each lender's obligation is several: if one fails to fund, the others have no legal duty to step in. The borrower gets one negotiation. Each lender gets a share sized to its appetite, and often the ability to sell that share later.

The arrangers win the mandate, negotiate the terms and build the group. On an underwritten deal they guarantee the whole amount and carry any shortfall, usually for higher fees. On a best-efforts deal the borrower carries that risk. Where there is an information memorandum, arranger and borrower prepare it together, and it usually includes a statement limiting the arranger's liability for its contents.

After signing, one bank acts as agent. It acts for the lenders, not the borrower: it passes on notices and compliance certificates, runs drawings and payments, and usually seeks instructions before exercising any discretion, for an agency fee. A security trustee or security agent holds any security for the whole group, so that a share can be sold without re-registering it.

Decisions go by thresholds in the agreement. Many waivers and amendments need only the majority lenders, a stated share of commitments that is typically two-thirds. Changes to principal, interest, fees or maturity generally need every lender. Those are common positions and each agreement sets its own.

A cement manufacturer, constructed for this page like every figure in it, needs US$240m for five years. Banks A and B win the mandate and underwrite US$120m each, intending to keep US$60m. Each has credit approval to carry the US$120m only until the loan is sold, and a final-hold limit of US$70m. Four other banks take US$30m each. Fees, limits and the voting threshold are the example's and not a market norm.

That excess, US$20m or at worst US$50m a bank, is the risk of underwriting. For the borrower the US$240m was certain from the first day; A and B carried the chance of holding more than they wanted until the loan was sold.

In year three a kiln outage breaches the leverage covenant and the borrower asks for a waiver. The agreement defines majority lenders as holders of at least two-thirds of commitments.

Bank C reads the outage as a symptom and wants more security before it agrees. With A and B for the waiver, Bank C, holding one-eighth of the debt, needs two of the other three participants to stop it, and A and B must find two of the four to pass it. Now change the request. If the borrower instead asked to move the maturity, then in an agreement of the usual kind Bank C could refuse by itself.

A bilateral facility is one bank and one agreement, with each decision made across one table. A club is a small group of relationship banks, often without a sell-down, that agree terms together; an arranger may or may not be involved. A syndicated loan is arranged and marketed to a wider group, some of which may have no other dealings with the borrower. The line between the last two is blurred in the mid-market, and the documents often look alike. Forms published by the Loan Market Association in the UK and Europe, and by its Asia Pacific counterpart for Australian deals, are common starting points.

DEFINED IN ONE PARAGRAPH → · CORPORATE LENDING → · MAJORITY LENDERS, WORKED →

A bank's approval paper on a share has to stand by itself. The arranger had access and time with management; a participant has an information memorandum and a set period to respond, while arranger and agent are generally protected from answering for what it says. The credit decision remains the participant's, so it needs its own view of the numbers and its own idea of what would make it say no.

The size of the hold decides the influence. A bank can ask how much it would need to block a waiver alone, or which others it would need, before it decides how much to take. It also needs to know how it could leave. In many investment-grade deals a transfer needs the borrower's consent unless a default is continuing, while a sub-participation commonly does not. For a borrower, the same provisions decide who will be at the table if trading turns, and whether that group wants the business to recover or wants its money back.