Loan Syndication

Concept:
 A syndicated loan is a loan offered by a group of lenders that work together to provide funds for
a single borrower

 A syndicated loan facility is an important source of large-scale lending where several lenders
come together to share credit risk in order to provide loans to a borrower in a single loan facility
agreement. Syndicated lending offers an alternative form of debt financing to bilateral lending
or corporate bonds, providing benefits to borrowers and lenders alike by addressing a number
of typical issues raised in lending markets such as market matching problems, information
asymmetry and moral hazard.
 A syndicated loan is a loan from a group of banks to a single borrower. When an individual lender
is unable or unwilling to fund a particularly large loan, borrowers can work through one or more
lead banks to arrange financing. That syndicate manager works with the borrower to arrive at
interest rates, payment terms, and other details described in a term sheet.

From a website:
Pro-competitive effects:
1. lender does not have to take on the full amount of the entire loan. If the borrower needs more
money, they can gain the cash flow immediately from several lenders.
2. networking and creating brand new banking contacts
3. take on more loans and at the same time, limit their exposure and risk.
4. The borrower has the ability to spread out to several institutions and increase their visibility
within the syndicated loan market.
5. Borrowers have extra leeway with syndicated loans. The loan pricing and structure can be
incredibly flexible. Borrowers are granted more options in shaping their loan, including
multicurrency options, risk management techniques, and no-penalty prepayment rights. Loan
terms can also be abbreviated. Not only can syndicated loans provide flexibility and comfort to
the process, but signing on to a syndicated loan can put you in front of the market and expose
you to new contacts and more competition for your business.

From the PDF files:

Pro-competitive effects
1. From a borrower’s perspective, syndicated loans make it relatively easy to borrow a significant
amount. The borrower can secure funding with one agreement instead of attempting to borrow
from several different lenders individually.
2. From a lender’s perspective, syndicated loans enable financial institutions to take on as much
debt as they have an appetite for—or as much as they can afford due to regulatory lending limits.
Lenders can stay diversified but still participate in large, high-profile deals. What’s more, they gain
access to industries or geographic markets that they don’t ordinarily work with. These loans are
contractual obligations, making them similar to other senior sources of capital, and they may even
be secured with collateral.
Federal Reserve Bank of Boston. "Why Do Banks Syndicate Loans?" Download "Full-Text Article (PDF)."
Accessed Oct. 4, 2019.
Payden & Rygel Research. "A Primer on Syndicated Term Loans," Accessed Oct. 4, 2019.

3. Refinancing in conditions of default: 
Discussions around restructuring in the event of default

are performed collaboratively by syndicate members, potentially generating efficiencies but also
increasing the risk of coordination. 


4. Lenders’ incentives for engaging in syndicated lending include the ability to earn fees and the
ability to gain exposure to certain markets and borrowers that might not be possible on a
bilateral basis while at the same time limiting their risk exposure.
5. Borrowers benefit from increased access to capital and lower financial transaction costs than
would be achievable through bilateral loans with the individual lenders.

6. Syndicated loans introduce different dynamics between lenders and the borrower which could
affect loan pricing and other terms. For example, the existence of lead arrangers/underwriters
within a syndicate who retain a significant proportion of the loan may reduce the perceived
riskiness of the loan to other participant lenders, who would then be willing to lend at a lower
price than would otherwise be possible. 


7. Compared to bond markets, syndicated loans provide the borrower/sponsor with greater
control over loan participants, as white lists can be used to exclude the involvement of certain
investors (such as so-called ‘vulture funds’). 


Anti-competitive Effects
1. syndicates also involve otherwise competing banks talking to each other about the terms of the
financing, sometimes with the potential to reduce competition between them.
2. Market soundings: At the pre-bid stage, any exchange of information can impact the
competitive outcome of the bidding process, as it has the potential to remove uncertainty
between competitors. However, where the level of liquidity and contention to lend is high, the
likelihood of anti-competitive conduct occurring is lessened.
3. Post-mandate collusion: While the EC Report remarked that this risk is relatively low, it raises a
competition risk where multiple interactions between lenders on transactions over time can
mean that lenders may be able to observe other’s strategies. It was noted that joint discussions
between lenders post-mandate in relation to loan terms should be limited to settling the loan
documentation and syndication strategy to avoid collusion. The risk is higher where an
unsophisticated borrower is involved or where the market is concentrated.

8. Two or more syndicate members agree to ‘oust’ another bank from the syndicate in order to
further their own interests in the next round 

9. Agreement between banks on an existing panel about pricing / terms to be proposed, before
the syndicate for the refinancing is decided. 


10. Allocation of ancillary services across banks, and the pricing of such services
11. the loan, which may be sub-optimal for borrowers/sponsors. Where banks have market power,
this could be viewed as anti-competitive bundling or tying.
12. There is a cartel risk where two or more syndicate members agree pricing / terms, outside the
context of negotiations in the sanctioned syndicate. Even if no understanding is reached, sharing
competitively sensitive information in relation to other financing arrangements should not take
place as this may reduce competition.
13. limit the borrower’s ability to influence certain aspects of the functioning of the syndicate, or if
intra-syndicate dynamics affect loan pricing and other terms to the detriment of the borrower. A
borrowers’ choice of a syndicated loan will be determined by the benefits and drawbacks
offered by this form of lending, and also by the availability and suitability of other forms of
financing.
14. Compared to bilateral loans, syndicated loans may present drawbacks to borrowers if they limit
the borrower’s ability to influence certain aspects of the functioning of the syndicate (such as
the negotiation of the final terms and pricing of the loan among the syndicate members). This
will depend on the sophistication of the borrower and his role in the formation of the syndicate.

15. On the other hand, information asymmetries between lenders may result in negative pricing
impacts for the borrower, particularly where the lead arrangers do not take on a significant
amount of the loan or are considered likely to sell it off on the secondary market. The literature
indicates that when syndicate-participant banks have information inferiority compared to the
lead arrangers in the syndicate, they require higher returns for the increased risk (arising from
the asymmetries) – but also that repeated interactions with a borrower can reduce or even
eliminate such an inferiority.76