is a form of lending in which a group of lenders collectively extend a
loan to a single borrower. The group of lenders is called a
syndicate. The loan is called a
syndicated loan, in contrast to a
bilateral loan, which is a loan made
by a single lender to a single borrower. Syndicated loans are routinely
made to corporations,
sovereigns or other government bodies. They are also used in
project finance and to
fund leveraged buyouts.
Syndicated loans are primarily originated by banks, but
a variety of institutional investors participate in syndications. These
include mutual funds,
loan obligations, insurance companies, finance companies, pension
plans, and hedge funds.
Syndicate members play different roles. Some just lend
money. Others also facilitate the process. It is common to speak of an
arranger, lead bank
or lead lender that originates the
loan, forms the syndicate and processes payments. But several syndicate
members may share these tasks. Syndications with two or more arrangers
are not uncommon. In a world where bragging rights are important for
securing future deals, a bank may be called an arranger for nothing more
than contributing a large part of the loan.
Most syndicated loans are
floaters, paying a spread over
Libor, but other structures abound.
Fixed-rate term loans, revolving lines of credit and even letters of
credit are syndicated. Loans may be structured specifically to appeal to
institutional investors. These might have two tranches:
Tranch A structured as a typical bank loan, such as a floater or
revolver, and offered to bank lenders, and
Tranch B structured as a fixed-rate term loan and offered to non-bank
Loans can be underwritten or originated on a best
efforts basis. In the former case, the arrangers commit to a particular
sized loan. It is up to them to recruit enough syndicate members to
secure that full amount. Should they fail, they make up the shortfall,
extending a larger portion of the loan than they had perhaps wanted.
With a best efforts deal, the arrangers try to recruit enough syndicate
members to achieve a desired loan size. If they fail, however, the
borrower simply receives a smaller loan than it had hoped for.
The borrower in a syndicated loan incurs two expenses.
One is the interest on the loan. The other is fees. These can take
various forms, depending on how the loan is structured. Fees may include
an administration fee, upfront fee, underwriting fee, commitment fee,
facility fee, utilization fee, etc.
Syndicated loans, like most loans, pose
credit risk for the lenders.
This can be extreme, as with some leveraged buyouts or loans to some
sovereigns. Credit risk is assessed as with any other bank loan. Lenders
rely on detailed financial information disclosed by the borrower. As
syndicated loans are bank loans, they have higher seniority in an
insolvency than bonds.
Syndication has been used for decades on an as-needed
basis by banks wanting to spread the risk of large loans. The market
took off following the first, 1973, oil shock. As the price of oil
skyrocketed, banks recycled deposits from oil exporting countries as
syndicated loans to oil importing countries, especially less-developed
countries in Latin America. The second oil shock, of 1981, and the Fed's
experimentations with monetarism, caused interest rates to shoot up in
the early 1980s. A number of less-developed countries—including
Argentina, Brazil, Mexico, the Philippines and Venezuela—defaulted on
their floating-rate loans. Former Treasury Secretary Nicholas Brady
spearheaded a bailout on behalf of the US Government. This combined
considerable debt forgiveness with a repackaging of loans as
bonds collateralized by US
Brady bonds, these instruments were
actively traded in a secondary market.
As the market for syndicated lending to less-developed
countries dried up, Michael Milken
was launching a wave of leveraged buyouts (LBOs) financed in part by
syndicated loans. The market experienced retrenchment again as LBOs
faltered, but syndicated lending entered the 1990s as a mature market
serving a variety of sovereign and corporate borrowers.
During the 1990s, an active secondary market for
syndicated loans emerged. This was fueled partly by the recession of
1991, which forced some banks to trim their balance sheets. Secondary
market trading continued a convergence of the syndicated loan and bond
markets. As those markets converge, the disparity in how they are
regulated presents both opportunities and legal uncertainties. In the
United States, most bonds are regulated under the
Act. Bank loans generally are not, and arrangers of syndicated loans
invoke a number of exemptions under those acts to avoid regulation.