how syndicated loans work
there is typically a lead bank or underwriter with a syndicated loan this institution is known as the arranger the agent or the lead lender the lead bank may put up a proportionally bigger share of the loan or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks the main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders or banks or institutional investors such as pension funds and hedge funds because syndicated loans tend to be much larger than standard bank loans the risk of even one borrower defaulting could cripple a single lender syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding syndicated loans can be made on a best efforts basis which means that if enough investors can t be found the amount the borrower receives is lower than originally anticipated these loans can also be split into dual tranches for banks that fund standard revolving credit lines and institutional investors that fund fixed rate term loans interest rates on this type of loan can be fixed or floating based on a benchmark rate such as the secured overnight financing rate sofr sofr is a dollar denominated interest rate used by banks for derivatives and loans this rate is based on transactions that take place in the treasury repurchase market 1because they involve such large sums syndicated loans are spread out among several financial institutions which mitigates the risk in case the borrower defaults types of syndicated loanswith a best efforts deal the lead bank does what it can by using its best efforts to arrange a syndicate for a loan this lead however isn t obligated to make any loans including in its entirety to the borrower itself rather it acts as an agent to approach other lenders to come together to finance the loan best efforts loans are commonly used when borrowers have poor credit histories and or when the economy is tough club deals typically involve loans of less than 150 million these loans are usually meant for a small group of lenders usually those with existing relationships with the borrower the lenders involved in this type of deal normally have an equal share of the loan including the interest rate and fees 2an underwritten deal is fully guaranteed by the lead bank if no other bank gets on board then this institution is fully responsible to finance the loan it may try to get investors later on down the road as an option to spread out the risk syndicated loans are also known as syndicated bank facilities example of a syndicated loansyndicated loans are usually too large for a single lender to handle for example china s tencent holdings signed a syndicated loan deal on march 24 2017 to raise 4 65 billion the loan deal included commitments from a dozen banks with citigroup acting as the coordinator mandated lead arranger and book runner which is the lead underwriter in a new debt offering that handles the books 3tencent previously increased the size of another syndicated loan to 4 4 billion on june 6 2016 that loan which was used to fund company acquisitions was underwritten by five large institutions citigroup australia and new zealand banking group bank of china hsbc holdings and mizuho financial group the organizations created a syndicated loan that encompassed a five year facility split between a term loan and a revolver 4