Loan Syndication: Structure and

Process
Tasneem Chherawala
NIBM

Loan Syndication
A process by which
A Syndicator / Mandated Lead Arranger
Appraises

Structures

Negotiates

Arranges

A Syndicated Loan for the Borrower

Funded by a Consortium / Syndicate of Participating
Banks
Under Common Terms and Conditions and Common
Documentation

A Syndicated Lending Facility

A single, multiparty credit agreement with equally
binding, common financing terms and conditions
and common documentation, in which all lenders
simultaneously commit to fund a borrower in similar or
different amounts
Pari passu rank of all lenders in the syndicated
facility
Bank obligation to lend only to the extent of its
own commitment
Individually enforceable legal claim by each
syndicate member on the borrower
Sharing of funding, repayment, and certain fees
on a pro-rata basis according to each banks
exposure
Decision making collective, simultaneous and
based on voting rights

Why Syndication?
Borrowers

Access to Large Funds

in one Deal at a greater
speed
Flexible Source of
Funding
Competitive interest
rates and terms
Dealing with Single
Bank
Single Documentation

Banks

Group / Borrower
Exposure Limits
Fee Based Income
Sharing of Risks
Establish / Strengthen
Client Relationship
Opportunity to
participate in future
syndications

Types of Syndication
Fully
Underwritten

Best Efforts

One bank commits to lend the entire amount

of the loan
Originally subscribes to the full loan
Original Loan Agreement is bilateral between
Borrower and Underwriting Bank
Subsequently invites other banks to
participate
If sell down not achieved, the Underwriting
bank must lend the remaining amounts
Borrower has the comfort of early disbursal
The Mandated Lead Arranger invites banks to
participate
Loan Agreement is multilateral and signed
after all funds are tied up
If the loan is undersubscribed, the deal may
not closeor may need major restructuring to
clear the market.
The lead arranger is not contractually
obligated to make up the difference
Borrower bears the risk of under-subscription

Role of the Syndicator

Is awarded the mandate by the
prospective borrower
Is responsible for initial appraisal and
structuring the loan facility, including
negotiating the pricing and terms and
conditions
Is responsible for designing the
syndication strategy, placing the
syndicated loan with other banks and coordinating with banks and ensuring that the
syndication is fully subscribed
Lends in the Syndication
Earns the Arrangement/Syndication Fee
Risk: Reputation Risk

Pre-Mandate Syndication
Process
Syndication
Desk

Borrower
New Project
Expansions
General
Corporate
Purpose
Refinancing
Acquisitions
Structured
Transactions

Initial Info.

Term Sheet

Mandate
Letter

Credit
Department
Initial Info.

Originate
Advise
Negotiate

Internal
Credit
Proposal

Understand
borrower need
Design loan
structure
Develop a
persuasive
internal credit
proposal
Sanction

Originating and Winning

Syndication Mandates
Sourcing /
Origination

Client Concerns

Requirements

Bidding
Approaching Own Corporate Clients
Tracking Market Deals

Capability of Syndicator Sanction

Ability to tie up loan
Speed of funds tie-up
Competitive commercials
Appraisal and Advisory capability
Strong Market Standing in Syndication
Networks
Established Team: Client Relationship,
Appraisal, Syndication, Decision making
Authority
Meet the promised timelines

Term Sheet and Mandate Letter

Term Sheet

Facility type, amount, currency

and tenor
Proposed underwriting
commitments
Drawdowns, moratorium period
and repayment
Any other structural
considerations: hedge
transactions
Pricing: Fees, Drawn pricing,
Undrawn pricing and
Prepayments
Covenants
Primary and Collateral security

Mandate Letter

Type of Syndication
Clause for Clear Market &
Market Flex
Fees, Costs and Expenses
Terms of Payment
Confidentiality clauses

Subject to Renegotiation,
revision and finalisation

Pricing Syndication Deals

Syndication Fees
Arrangement
Fees
Underwriting
Fees
Upfront Fees
Legal and other
Fees
Agency fees

Rate of Interest
Fixed / Floating
Rate
Floating Rate
Benchmark
Reset of Float
Credit Spreads
Spread Reset

Other Charges
Commitment
Fees
Prepayment
Charges

The pricing must not only meet the clients requirements but
also reflect the needs of the potential participating banks.
Aggressive pricing in the pre-mandate phase may win the
mandate but find it difficult to sell-down
Equilibrium pricing sets the balance: low enough to win the
mandate, high enough to sell in the market

Roles in Syndication, Risks Assumed

and Pricing Requirements
Role

Responsibility

Risks

Pricing

Syndicator

Initial Appraisal, Due

Diligence, IM
Preparation, Advisory
and Arranging

Reputation Risk

Arranger Fees

Underwriter

Commitment to Lend
Entire Amount prior to
Syndication

Syndication failure Underwriting Fees

Very large
Exposure risk

Participating
Bank

Independent Appraisal
and
Commitment to Lend
part of the amount

Credit Risk

Upfront Fees +
Interest

Agent Bank

Monitoring, Ministering
consortium decisions,
Loan Operations and
administration

Reputation Risk,
Operational Risk

Agency Fees

Interest Rate Types

Fixed for the tenor of the loan
Beneficial for the borrower in increasing interest rate environment or
anticipated increase in project risks and to the lender in a decreasing
interest rate environment
Makes the financial planning for the project easier
Lenders will not be able to pass on future interest rate increases and long
tenor funding costs will have to be ex-ante priced into the fixed rate

Floating Rate
Beneficial for the borrower in decreasing interest rate environment and to
the lender in increasing interest rate environment
May lead to financial difficulties for the project during periods of sustained
increases in interest rates, , especially for projects which may be unable to
absorb future interest rate volatility in product pricing especially under tight
DSCR

Depending on the interest rate views, can be managed with IRS

Determination of Spreads
Credit spread on base rate is the ex-ante compensation to lenders
for the credit risk of the project

Project
B/S or SPV funding
Performance capability
Financial strengths
Sector / Industry
Political and environmental risks
All of which are typically summarized
in an internal and / or external credit
rating which maps to a Probability of
Default (PD) for the project

Repayment Structure
Door to door tenor
Long gestation period
Ballooning or part finance

Facility
Seniority of the facility
Asset coverage ratio and collateral
security
Credit enhancements and Guarantees
available
Recourse to Sponsor
Hedges and insurance
All of which translate to a Loss Given
Default (LGD) for the project

Market
What are the current pricing
structures for similar deals in the
market

Spread Determination
Strategies
As opposed to standard loan facilities to established commercial enterprises,
new projects, in new sectors have greater uncertainties in performance thus
low rating and high PD
However, with tight documentation, covenants, risk mitigating contractual
agreements and collateral security, the expected LGD on load exposures can
be substantially reduced
If the loan pricing accommodates periodic spread resets, longer tenor loans
can accommodate lower ex-ante spreads which compensate lenders for
project risks only upto the spread reset dates and which can be revised
upwards in case the project rating worsens subsequently
In international markets, step-up and step down, and pricing grids are used
for long-tenor facilities linked to key financial ratios like DSCR, Debt/EBITDA

Setting the Syndication Fees

Client reputation
Relationship with the Client
Best efforts or underwritten
Level of Sell down confidence
(placement ability)
Competition (aggressive strategy)
among syndicators
Existing fee structure in the market
Market Liquidity
Relationship Building: New client / New
sector exposures / Cross Sell
opportunities

Post Mandate Syndication

Process Detailed Project
Project

Inviting Lenders
Obtaining Lender
Credit Sanctions
Harmonization of
Terms and Conditions

Financial
Closure

Due Diligence
Legal
Technical
Financial
Market Reports
KYC

Arrangement
Requirements
Commitment Amounts
Upfront fees
No. of banks invited
Managing under
subscription or over
-subscription

Report (DPR)
Techno Economic
Viability Study (TEV)
Financial Model

Launch of
Information
Memorandum

Documentation

Information Memorandum
Due diligence report
A commercial description of the borrower's
business, management and accounts
Project Report
Details of the suggested credit structure and
pricing
Guarantor and collateral details

It is not a public document and all invited

lenders that wish to see it usually sign a
confidentiality undertaking

Addressing Participating Bank

Concerns
Reputation of Syndicator Past track
record
Syndicator Sanction
Extent and timeliness of information
sharing
Ability to harmonize terms and
conditions

Arrangement Strategy
The Arrangement strategy of the syndicator can enhance
substantial the fee retention (skim)
Commitment Amounts
Upfront fees
No. of banks invited and expected to participate
Strategy for managing under subscription or over
-subscription

Distribution Strategy: Example

A syndication loan facility of Rs. 300 cr.
The MLA can create multiple participation tiers with
different upfront fees for each tier
For example:
Participation Rs. 50 cr: Upfront fee 30 bp
Participation Rs. 25 cr: Upfront fee 20 bp
This structuring encourages banks to step up for larger
participations and can lead to a smaller consortium group
which is in the interest of the borrower and the consortium
It can keep the participation open to smaller banks albeit
with lower upfront fees, which is in the interest of the
syndicator

Syndicate Structure
Initial Underwriting
No.
of
Bank
s

Commit
Amount

UW

General Syndication

Invite
Amount

Total
Commit

%
Scaled
Back to

Total
Commit

Final
Alloc

Total
Alloc

Alloc

1000

200

200

43.26%

86.52

86.52

800

800

43.26%

86.52

346.1

Sole Syndicator +
Underwriter

Other
Underwriting
Banks

Tier 1

150

600

46.26%

69.39

277.6

Tier 2

100

400

55.90%

55.90

223.6

Tier 3

50

100

66.20%

33.10

66.20

1000

1000

1000

1000

2100

1000

Financial Closure and

Documentation
Parties Involved
MLA
Participating Lenders
Borrower
Guarantor
Legal Counsel
Independent
Engineer
Security Trustee
Facility Agent

Documentation
Common Loan Agreement
Security Documents
Credit Enhancement
Agreements
TRA Agreement
Power of Attorneys
Inter-creditor Agreement
Lenders Agent Agreement
Security Trustee Agreement

Post Closure Loan Administration

The Lenders Agent Bank that:
Takes care of the Administrative arrangements over
the term of the loan
Paying agent: funds administration and disbursements,
interest calculations and repayments, fee and interest
distribution
Monitoring: compliance and covenants enforcement

Point of Contact: Manages the ongoing relationship

between the syndicate members and the borrower.
Ministerial role, not discretionary
Earns the Agency Fee

Post Closure Loan Administration

Function

Parties
Involved

Governed
By

Cond.
Prec.

Agent
Bank

Common
Loan
Agreement

Loan
Admins

Agent
Bank

Financial
Info

Agent
Bank
and
Individual
Syndicate
Members

Borrower
Default
Issues
Borrower
and

Collateral
Admins

Security
Agent

Syndicate
Group

Bank
Default
Issues
Borrower
and
Syndicate
Group

Common
Loan
Agreement

Common
Loan
Agreement

Common
Loan
Agreement

Common
Loan
Agreement

Common
Loan
Agreement

Agency
Agreement

Agency
Agreement

InterCreditor
Agreement

Security
Agreement

InterCreditor
Agreement

Security
Trustee
Agreement

Sample Syndication Timelines

Pre Mandate

2 weeks

Post Mandate

1 week

Credit
process

Agree bank
list

Negotiate
term sheet
& mandate
letter

Prepare
information
package

Mandate
awarded

Negotiate
documents
with
Borrower

2 weeks

Launch of
syndicatio
n
Commitme
nts
received

1 week

Post Signing

1 week

Signing
Negotiate
documenta
tion with
participant
s

1- 3 weeks

Fulfilment
of
Conditions
Precedent

The Syndication process can take as little as one month in the case of an
acquisition loan or as long as nine months in the case of project financing

Disbursal

Global Syndicated Lending

Asian Syndication Markets

Fees and Market Share of Indian

Banks 2012
MLA
Bookrunne
Ra
r Rank
nk

No. of
Deals
Arran
ged

Loan
Proceed
s (USD
billion)

Market
Sha
re%

Imputed
Fees
(USD
millio
n)

State Bank
of India

67

26.26

10.1%

104.3

Axis Bank

15

27

5.19

2.0%

35.5

IDBI Bank

13

16

5.96

2.3%

16.9

ICICI Bank

15

23

16

3.07

1.2%

19.0

Indian Banks in the Indian League

Tables 2012