Loan Syndication is the process where a bunch of banks and lenders fund various fragments of a loan of an individual borrower. Loan Syndication happens when a borrower requires a loan amount that is too big for a single bank to provide. Thus, a bunch of banks come together to form a syndicate and provide the necessary loan amount to the borrower.
In loan syndication, a group of banks provides loans jointly to a single borrower because one bank cannot meet the huge requirement of the borrower as it may be beyond its risk exposure. This type of loan syndication process is required by large companies working on a large project, and that project requires a huge amount of capital for their business.
Features of Loan Syndication
- Large amount
- No separate agreement between an individual bank and the borrower.
- No ambiguity used to be there.
- The length of the contract is generally between 3 to 15 years.
- Low risk is found in loan syndication.
- Each bank is not necessarily to contribute an equal amount.
Loan Syndication Process
There are 3 stages of loan syndication process:
The pre-mandate step, which is started by the borrower, is the first stage of the loan syndication process. The borrower must either work with a single lender or get competitive bids from numerous lenders at this step. The borrower must provide the lead bank a mandate. Following the selection of the lead lender, the appraisal procedure will begin. The lead bank will consider the borrower’s demands and prepare a loan structure and credit proposal for the borrower.
The lender then places the loan and makes the payout. The lead lender starts marketing the loan on the secondary market, preparing an information memorandum, term sheet, and legal documents. The lead bank will then approach other banks to see whether they want to join up. The loan money is disbursed after the loan contract is finalized.
The last stage is the post-closure stage, which entails escrow account monitoring. The escrow account is the account into which the borrower will deposit his or her earnings. It is the agent’s job to guarantee that loan repayment takes precedence over all other obligations, and that payment is made first. In the post-closure stage, it’s the job of the agent to manage the operating and running of the loan facility on a regular basis.
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