Syndicated Loan

A syndicated loan is a loan granted jointly by several banks. Because the amount is often too large or risky for a single bank, they share the exposure. One of the banks usually takes over coordination. That role of arranger covers structuring, approaching further banks, negotiating a single uniform credit agreement and often ongoing administration as agent. Security is regularly held by a security agent for all participants. What matters for the borrower is that all banks lend on the same terms under one agreement, so it has a central point of contact and need not negotiate with each bank separately.

A distinction is drawn between a firm underwriting, where the lead bank commits the full amount and then sells down participations, and a best efforts commitment, where financing only materialises if enough banks subscribe. The first gives a buyer in an auction considerably more certainty. Besides pricing, the majority requirements for amendments and waivers are negotiated, because in a crisis it becomes decisive whether a single bank can block a solution. In acquisition financings this form is standard from mid-sized volumes upwards. Under a firm underwriting commitment the lead banks bear the risk of not placing the loan in full and hedge that risk through market flex provisions allowing the margin to be increased within an agreed range.