Home Finance Loan Syndication – Meaning, Participant, Type, Example

Loan Syndication – Meaning, Participant, Type, Example

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Loan syndication This means that a group of lenders work together to provide a loan to a single borrower. This borrower can be a corporate person, project finance, Or a government institution.

Debt syndication or loan syndication occurs when a borrower requires a large amount of money that a single lender cannot provide, thus multiple lenders form a conglomerate. (called syndication) To provide the requested loan to the borrower.

Here, a lender acts as an arranging bank, who brings together other lenders to form a syndication. Each lender contributes its share of the loan amount, and all lenders equally share the risk of providing the loan to the borrower.

Debt syndication is commonly used in corporate financing. Companies ask for corporate loans for various business reasons such as financing Merger or acquisition or any other lager spending projects.

1) bank arrangement

The arranger is also known as the bank manager (for loan syndication) and is mandated by the borrower to bring other lenders along to form a set of syndication. The bank should acquire other lending parties who are willing to participate in the loan syndication process and agree to share the lending risk.

The financing period negotiated between the borrower and the arranging bank is a . is recorded in term sheet.

{a term sheet An agreement signed between a borrower and the arranging bank that contains detailed information such as the amount of the loan, repayment schedule, Rate of interest on loan granted, loan term, and other loan-related fee structure.}

2) Agent (optional role)

Here an agent acts as a link between the borrower and the lenders, who owns a contractual obligation to the borrower and the lenders.

The agent’s role is to provide lenders with information that allows them to exercise their rights under the syndicated loan agreement.

pay attention: The agent’s duty is primarily to manage communications between the two parties, and is not required to advise either party.

3) Trustee

The trustee has a duty to protect the property of the borrower on behalf of the lenders. The loan syndication process avoids providing separate security to different lenders. The trustee plays a major role in the entire syndication process. If there is any possibility of risk, the lender will instruct the trustee to apply the money / security from the borrower.

1) underwriting deal

One underwriting A deal is a type of written paper that is signed by lenders (debt arrangers) in which they guarantee to syndicate the requested amount (by par or proportion) within the time frame fixed by the borrower.

2) best effort syndication

In this type of syndication, Arranger Group is committed to giving its best to arrange for less than or equal to the full amount of the requested funds.

3) club loan

In club loan syndication, there is no bank and facilitation agent involved earlier, here, the borrower himself decides how much money he needs from each lender.

For example, the borrower will request at least 50 lack From ABC Bank, 70 lack From XYZ Bank, And 30 lack From PSP Bank.

example of loan syndication

let’s assume ABC Company Interested in buying an abandoned complex to convert it into a shopping mall. For this the company may need ₹ 1,000 crore.

ABC Company will discuss the idea SBI Bank To obtain a loan, which the bank agrees to provide after looking at the credit score of the company. Since the loan is too large to lend to any one bank, the bank will decide to form a syndication group with them. Investor / Bank Those who are interested in these schemes to invest money.

From the point of view of investors, it is a project financing Opportunity for them.

SBI Bank will act as the manager of the loan syndication process by bringing together other interested banks (Examples: HDFC Bank, Muthoot Finance and State Bank of India) To participate in the loan.

As the lead manager of the entire syndication, SBI Bank will explain the terms and conditions, and other project details, to these lenders.

After the project is completed, SBI Bank will have to manage some part of the cash flow with other lenders as well.


The reference

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