There are several ways for businesses to fuel their growth, with the required capital often tied to key business objectives.

In some instances, these milestones require so much capital that several lenders come together to spread the risk and cover the cost.

This is what’s called a syndicated loan. Here’s a short overview of how the work.

Loan syndication refers to a group of lenders, often banks, coming together to fund a large loan. This could be to finance a large project, or for general fundraising. Both private companies and state-owned entities can use syndicated loans.

Loan syndications typically occur because the size of the loan or the risk involved is too large for any single lender to manage. It could also be because the loan requires specialised lenders with particular expertise.

Syndicated loans usually have a ‘lead bank’ who becomes the ‘lead arranger’, ‘agent’ or ‘lead lender’ who will structure the deal and source the other lenders.

Together, the group of lenders will split the loan, each providing a portion. The lead bank often contributes more.

The risks and returns are shared among the syndicate.

There are three main types of syndicated loans, each with different levels of commitment and risk for the lenders:

Best efforts syndication

As the name suggests, this is where the lead lender tries its best to find lenders to fulfil the requested loan amount but does not guarantee that the full amount will be raised.

A best efforts syndicate reduces risk for the lead arranger but may result in a smaller loan and with renegotiated terms. These types of loans are typically offered to riskier borrowers or during periods of uncertainty for the credit markets or wider economy.

Underwritten deal

An underwritten deal is where the lead arranger guarantees the full loan amount, even if they fail to find other lenders to join the syndicate.

If they don’t find sufficient lenders, the lead arranger has to increase its funding to fill the gap. They may then try to sell portions of the loan to other lenders afterwards to form the syndicate but until they do, they are liable for the full amount of the loan. This means they are taking on additional risk and liabilities.

These types of loans are often used for large, high-profile corporate deals where the lead arranger has a high degree of confidence they will be repaid.

Club deal

Club deals tend to be smaller, more collaborative syndicates involving 2-5 banks for loans with a value of less than $150 million.

The banks involved all tend to have an existing relationship with the borrower and each take an equal share of the loan and risk.

Similar to a syndicated loan, a syndicated mortgage is a type of loan involving multiple lenders that is tied to real estate.

Syndicated mortgages usually involve large properties such as commercial buildings or for purchasing land.

A syndicated mortgage is a loan that is secured by a mortgage on the land or property asset. This type of loan involves multiple lenders and can become a complex arrangement when funding a very large real estate transaction. Syndicated mortgages commonly finance most of the initial phases of real estate development like planning and zoning.

Syndicated loans involve a number of parties, including an arranger, lead bank, syndicate members and a borrower.

Borrower

The borrower is usually a business, large project or project sponsor but it could also be a government or state-owned enterprise that requires a large loan. The borrower initiates the process and is responsible for repaying the loan with interest.

Lead bank

The lead bank is often a large bank or financial institution (e.g., HSBC Innovation Banking) that takes the lead role in structuring and arranging the loan by setting the terms and sourcing the other lenders.

Sometimes they will commit to the full loan amount initially before finding others to join the syndicate later on. They may lend the largest share of the loan and they often earn arrangement fees for their role.

Syndicate lenders

Syndicate lenders are the other banks or financial institutions that join the syndicate by committing to lending a portion of the total loan, sharing both the risk and potential returns.

There may be a number of reasons that banks syndicate loans but it is mostly to manage and share risk, share capital efficiency and profitability. Factors can include:

• Risk sharing by reducing each lender’s individual exposure
• Capital efficiency by meeting regulatory capital requirements (e.g., Basel III)
• Balance sheet management by avoiding over-concentration in one asset
• Maintain liquidity by ensuring funds are available for other uses
• Fee generation
• Maintain client relationships
• Enhance reputation, market position and deal flow

Loan syndication can be advantageous for both borrowers and lenders for a number of different reasons.

Advantages for borrowers:

• Enables access to larger funds that may not be possible from a single lender
• Simplifies the process of using multiple lenders as there is usually one point of contact (often the lead bank)
• Backing from multiple lenders can help enhance corporate credibility
• Removes reliance on a single bank
• Can generate competitive bidding that can yield more favourable loan terms

Advantages for lenders:

• Risk is shared among all syndicate members
• Can diversify their lending portfolio
• Facilitates fee generation from arranging or participating in the syndicate
• Builds client and peer relationships, which can enhance a lender’s market position and reputation

Like all lending, syndicated loans carry risk. The level of risk depends on several factors including the borrower’s credit rating, the loan structure and external market conditions.

For borrowers, the risks associated with syndicated loans include potentially higher upfront costs (e.g., arrangement fees, syndication fees), higher interest rates and additional administrative complexity given the number of parties involved.

If the borrower falls into financial difficulty the syndicate may push for loan restructuring or new (less favourable or more restrictive) terms, which can also result in reputational damage and make it more challenging for the borrower to secure future loans.

For the lenders involved in the loan syndicate, they face credit risk (that the borrower may default) as well as market risk (if interest rates rise the loan may be less financially advantageous for the lender).

Lenders may also face difficulty selling the loan on to another party if they need a quick exit. Like the borrower, they also face additional administrative complexity and potential reputational risk.

There are a number of factors to take into account when considering whether a syndicated loan is right for your business.

Your choice of loan will depend on your goals, financial situation and the scale of your funding needs. Governments often use the bond markets to raise funds. Some companies also have the option of raising funds in the equity and bond markets, so they will be assessing the pros and cons of each method.

A syndicated loan may be the most appropriate option for you if you require a large amount of capital, which cannot be met by a single lender and if you have a strong credit profile and robust business plan.

If you are a small or early stage business, it is unlikely to be the most appropriate form of financing for you.

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