What is a syndicated loan?
A syndicated loan, also called a syndicated bank establishment, is financing offered by a group of lenders — called union– who work together to provide funds to a single borrower. The borrower can be a business, a large project, or a sovereign government. The loan can involve a fixed amount of funds, a line of credit, or a combination of both.
Syndicated loans arise when a project requires too much of a loan for a single lender or when a project requires a specialized lender with expertise in a specific asset class. Loan syndication allows lenders to spread risk and participate in financial opportunities that may be too large for their individual capital base. The interest rates on this type of loan can be fixed or variable, depending on a reference rate such as London Interbank Offered Rate (LIBOR). LIBOR is an average of the interest rates that the world’s major banks borrow from each other.
Key points to remember
- A syndicated loan, or syndicated bank facility, is financing offered by a group of lenders, called a syndicate, who work together to provide funds to a borrower.
- The borrower can be a business, a large project, or a sovereign government.
- Because they involve large sums, syndicated loans are distributed among several financial institutions to mitigate the risk in the event of default by the borrower.
Understanding a Syndicated Loan
In the case of syndicated loans, there is usually a lead bank Where subscriber, known as the principal arranger, agent or lender. The lead bank can set up a proportionately larger share of the loan, or it can perform tasks such as distributing cash flows among other union members and performing administrative tasks.
The main purpose of syndicated loans is to spread the borrower’s default risk among several lenders or banks, or institutional investors, such as pension funds and hedge funds. Since syndicated loans tend to be much larger than conventional bank loans, the risk of a single borrower defaulting could cripple a single lender. Syndicated loans are also used in the debt buyout community to finance large business acquisitions with primarily debt financing.
Syndicated loans can be made on a best effort basis, which means that if enough investors cannot be found, the amount the borrower receives is less than originally expected. These loans can also be split into duplicates slices for banks that finance standard revolving lines of credit and institutional investors that finance fixed rate term loans.
Because they involve large sums, syndicated loans are distributed among several financial institutions, which mitigates the risk in the event of default by the borrower.
Example of a syndicated loan
Syndicated loans are usually too large to be managed by a single lender. For example, Chinese company Tencent Holdings Ltd., the largest internet company in Asia and owner of popular messaging services WeChat and QQ, signed a syndicated loan agreement on March 24, 2017 to raise $ 4.65 billion. The loan agreement included commitments from a dozen banks with Citigroup Inc. acting as coordinator, mandated lead arranger and book runner, who is the primary underwriter of a new offering of debt securities that manages the “books”.
Previously, Tencent increased the amount of another syndicated loan to $ 4.4 billion on June 6, 2016. This loan, used to finance business acquisitions, was underwritten by five major institutions: Citigroup Inc., Australia and New Zealand Banking Group, Bank of China, HSBC Holdings PLC and Mizuho Financial Group Inc. The five organizations together created a syndicated loan which included a five-year facility split between a term loan and one revolver. A revolver is a revolving line of credit, which means the borrower can pay off the balance and borrow again.