Syndicated Finance


THE SYNDICATION PROCESS

Certain borrowers in need of credit may decide to go the route of a syndicated loan because of the amount of financing they want (i.e., it would be beyond the capacity of one lender) or because the risk factor necessities dispersion over a number of institutions. Within the syndicated loan framework are a range of alternatives, and a borrower starts by designing a borrowing strategy and loan structure best suited to its needs and objectives. While the credit itself is clearly the primary objective, a borrower may seek to meet any number of subsidiary objectives, such as access to a certain bank's services in the future, improved relations with existing banks with which it deals, or access to a geographic region it is contemplating entering.

THE LEAD MANAGER'S PROPOSAL

As noted, syndicated loans are underwritten, in whole or in part, by a group of banks. A first task for the borrower, after deciding on the nature of the syndicated loan best suited to its needs, is to issue an invitation to one or more lenders to bid on the lead management job, this is often undertaken by the Business Finance Boutique. The lead manager is the vehicle for structuring, placing, and managing the loan and is a critical element - perhaps the most critical - in the syndicated loan process. 

The borrower may issue a general invitation for offers, choose from a short list of three to five candidates, or else negotiate directly with one lender. If the competitive bid route is chosen, the borrower has several options:

Open bidding. The borrower solicits a high number of offers. In the past, this approach has generated chaos in the market.

Select bidding. Here, the borrower looks for bids either from a short list of three to five lenders or from several that have a speciality knowledge in a particular field in which the borrower operates.

Queue. Not strictly an option, it involves the borrower offering the mandate on a rotating basis if the lender refuses. 

Banks vie for lead management for two primary reasons. One is a greater return from the management fee. The other is prestige and the likelihood of new and repeat business as lead manager. They also want to be seen as being at the leading edge of the syndication business, which is hard to accomplish except as lead manager. 

THE DECISION TO PARTICIPATE

When banks hear of a bid offer, they undertake an internal process to determine whether to make an offer and what offer to make. The process involves an analysis of credit risk, loan price, lending capacity, and the marketability of the loan. The last is a key point, because lenders do not want to state they can handle the business and then fail to do so, as they lose credibility. The information from the analysis and a proposal go to the department that approves or disapproves the offer; it may request additional information or changes. If it does not approve the credit, it should give immediate notification to the borrower in a way that will not affect potential future business. Sometimes only a conditional approval is given. Then the task is to develop a bidding strategy, of which there are many, that will balance a high underwriting risk, a low return, or both. For example, the bank can aim for a greater yield through an unequal fee distribution (for this option, the bank must have an unrestricted mandate), aggressive retention targets, or a combination of the two. Another factor is the potential for getting an unconditional mandate. If that proves unlikely, then price return is the key factor. 

THE PROPOSAL 

If a decision is made to offer a bid, the bank must send the borrower a specific proposal. The basic objectives underlying the proposals are to establish the terms and conditions of the loan, clarify as much as possible all the points involved, and stimulate the interest of the borrower. 

PREPARING FOR PLACEMENT

Having received the mandate, the lead bank then proceeds to place the loan. In general , the loan agreement specifies a time limit. How the task of placement is handled internally varies. Inbafin carries out its syndication business at a London branch and keeps syndicated loans distinct from other business, such as the Euro bond market, for better evaluation and tracking. JP Morgan and The Business Finance Boutique have more traditional approaches: Their investment banking departments handle the syndications. In turn, those departments are split into buying and execution units. Sometimes, merchant banks develop a syndication support group of specialists in this area of lending. In between are many other alternatives geared, in part, to the market or divisional or geographical units in each bank. In-house politics also play a role. No particular structure is absolutely superior; the key is to choose a system that best suits the needs of the bank. 

The lead manager spends the first days after the mandate is awarded largely on internal tasks: deciding on the structure of the syndication management group, preparing lists of potential managers and of general participants, setting the fee structure, and retaining outside legal counsel for the contract. Legal counsel is a vitally important element in the syndication team, and it is best to find the most competent lawyer possible. The team also devises a lesser amount of the loan to make it look more feasible, with the expectation that there will be an over-subscription that will make up the balance. A very critical task is to decide on the formation of the management team. Much of this work will already have been done at the proposal stage, and some of the elements in the plan may be dictated by conditions established by the borrower. As for the structure of the management team, today there are generally several managers and sometimes co-manager, some of whom the borrower may have specified for that role. 

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