Originating and structuring syndicated loan facility; an end-to-end approach
At the macro and geo-politic level, the year 2024 saw several major elections. In many cases, there is a new hand at the helm of affairs.
Interest rates remain elevated, and banking and lending regulations are still evolving. The weight of capital from Non-Bank Financial Institutions remains high with expectations of increased dominance, particularly in the space of private credit with more and more managers expanding to asset-based lending. Many economies and financial sectors are navigating through these developments to sustain economic growth.
In advanced economies, we see huge infrastructural development which is underpinned by the robustness of the financial ecosystem. So, development within the African continent will require a dynamic approach to how the sector strives and how it will impact the continent. While working in West Africa some time ago, I had the privilege to be involved in several groundbreaking transactions across sectors such as education, health, aviation etc and I was amazed by the number of institutions that had to coordinate to close a single financial transaction. The challenge has been the fact that, due to the Single Borrowing Limits (SBL) Guidelines from Central Banks, a single lender cannot finance say a big airport development or manufacturing plant due to SBL constraints. Again, to reduce risk exposure, financial institutions are cautious about the level of exposure and the extent of risk to assume.
In this article, the motivation is to highlight an end-to-end approach to how mid to senior-level Relationship Managers, Banking consultants, Transaction Advisors, Investment bankers and managers can be guided to originate and structure syndicated loan facilities. I will also endeavour to address some of the nuisance that arises therefrom. For very experienced colleagues who have had hands-on experience in syndicated loan facilities, this piece of information may not be interesting for your reading pleasure.
Syndicated loan- what is it?
A loan is basically a financial instrument in which one party borrows from another that is expected to be paid back with interest. A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as Lead Arrangers. The syndicated loan market is the dominant way for large corporations (Borrowers) in for example the United States and Europe to receive loans from banks and other institutional financial capital providers. Financial law often regulates the industry.
Formats for Loan Arrangement
In the syndicated loan market, there are 3 key types of loans that are arranged by capital providers. The first one is a Bilateral loan where the lending arrangement is a one-to-one relationship, where there are no intentions for a bank or lender to sell down/distribute risk to another bank. A bilateral loan is usually private in nature. For instance, a bank can lend USD100m directly to a borrower (Company A) and it ends there.
The next option is a Club loan which is typically self-arranged and heavily reliant on the company’s (Borrowers) relationship banks. Since the borrower’s banks are involved, usually no sell-down appetite is envisaged if the lenders are able to take up the full amount of the loan request. For instance, if Company B would like to raise say a USD100m, the full amount can equally be shared among Four banks who participate with USD25m each.
The last type of loan is the syndicated loan which has already been explained above. Banks are mandated to arrange a syndication, meaning the banks must come together to raise funding and one bank must coordinate activities with the rest of the banks. Here there is also the need for a Lead arranger(s). The arrangers may decide to either underwrite the volume and price of the loan or use best best-effort basis to raise the amount. An underwriter syndicate is a group of investment banks and broker-dealers formed temporarily to sell new issues of a company’s amount to investors.
The reason for an underwriter syndicate is to pool the resources of multiple Banks when an issue is too large for one firm to take on. On best best-effort basis, there is no obligation on the banks to print the full volume or amount the borrower wants. Assuming Company C wants to borrow USD100m, the lead Coordinator or Arranger (Bank X) can hold USD25m and the rest of the syndicated 5 lender banks can take up the rest of the USD75m depending on their SBL and Credit Risk appetite level.
Comparing Syndicated vs Bilateral Loans
The key challenge that confronts Boards of Directors, Corporate Treasures and borrowers has to do with the choice of financing, i.e. whether to go in for a syndicated loan facility or Bilateral loans. Let me spend some time to highlight the pros and cons of each in the table below:
| Some considerations | Syndicated loans | Bilateral Loans | |
| 1 | Funding Quantum | Borrowers can achieve larger facility sizes.It can be underwritten and prefunded, confirming certainty of funding, pricing, and timing. | There is limited facility size constrained by lenders’ limits. |
| 2 | Administration and Cost Management | The multiple facilities can be consolidated into one for earlier administration and cost savings. | One loan per bank means you have multiple loan facilities to monitor and manage individually. This is an inefficient efficient |
| 3 | Broad funding base and diversified relationships | Helps borrowers to tap into varied international banks and widening contacts.Helps to build much closer relationships with core banking partners participating in the facility | Relationship is built with an individual bank that limits funding sources. |
| 4 | Build Market Presence | The publicity via loan market associations/journals enhances credibility.Pricing benchmark is provided to the market and increases publicity for the borrower. | Borrower is limited to establishing market presence and reputation. |
| 5 | Risk Mitigation | The use of facility agents in the transactions helps to support future amendments, and waivers based on the majority of lenders decisions which mitigates the risk of one bank. | All amendments and waivers will be dependent on the lender’s decision.There is little room for Borrowers’ negotiation. |
Key Features in Syndicated Transactions.
Common documentation– Since syndicated loan facilities involve multiple banks, one major challenge will be to deal with individual Banks and documentation. Thankfully, efforts to promote standardisation by the Loan Market Association (LMA) have produced standard documentation to support loan market participants. They endeavour to keep the documentation under constant review to ensure that it continues to meet the aims and needs of the primary and secondary loan markets. The documentation is produced after extensive consultation with leading loan practitioners and law firms so as to represent an agreed common view of documentation structures. Standardisation of the “boilerplate” areas of the documents allows lenders and borrowers to focus on the more important commercial aspects of individual transactions. In effect, the margin, tenor, covenants, and all conditions are the same across the board. They are widely regarded as the body that establishes guidelines for the EMEA loan market. These are, by their nature, wide-ranging and relate to both primary and secondary markets.
Covenants: Most syndicated loans generally have more covenant protection than bonds. There are generally 3 types of Covenants.
- Financial Covenants are minimum financial benchmarks used by lenders to evaluate an issuer`s ongoing financial health and act as a trigger in the event that the borrower is unable to pay. Type ratios that are monitored include Interest Cover ratios such as Earnings Before Interest and Tax (EBIT) aimed at tracking debt serviceability. Leverage ratios such as Debt/EBITDA must be checked to monitored to help cap the aggregate amount of debt a borrow can undertake. Lenders do not lose sight of the Balance Sheet ratios such as minimum net worth to help guard against capital reductions.
- Negative Covenants basically focus on actions that the issuer agrees not to perform within the borrowing arrangement. For example, a borrower should not pledge its assets in support of other debts and even not sell its major subsidiaries or assets.
- Affirmative Covenants are typically actions by the issuer agreeing to perform such as provision of regular Financial Statements, compliance with Laws and maintenance of licenses and authorisation to trade.
Some loans are structured with an inbuilt cash fall mechanism to include Debt Service Accounts (DSA), Debt Service Requirements Accounts (DSRA), Collections Accounts etc to protect banks/Lenders. Guarantees provided protect lenders against defaults.
Repayments: Depending on the nature of the Loan Facility. The structure of the facility could be Revolving Credit Facility (RCF). Meaning that the facility is available for drawing and redrawing throughout the life of the facility. Just like Term loan facilities, one of the main characterise of RCF is that they are usually considered to have a bullet repayment- where the principal of the loan is repaid in full at maturity. In the case the loan is amortized, a repayment schedule is made to the borrower to comply on specific dates per terms of the loan.
Tenor: Loan tenor is the amount of time until a loan is due. It describes the length of time remaining in the life of a financial contract. From the issuance date to the maturity is usually referred to as ‘’door-to-door’’ maturity. Leverage loans can run for 7 years, and Project Finance loans can run over 10 years.
Purpose: Syndicated loans must have a purpose for which it is arranged and must be made known. For example, what the proceeds of the loan will be used for should be clear to lenders. This can include Capex, acquisition, Asset-backed financing etc.
Interest rate: Pricing on syndicated loan facilities is largely dependent on the currency of the loan. For example, local currency syndicated loans are usually priced off the Treasury bill rate/local reference rate with a margin. Foreign Currency-denominated loans such as USD, GBP, and EUR are priced as a margin/Spread over a reference rate. The margins on loans can vary, thus stepping up or down based on the issuer`s Credit ratings, financial ratio, utilisation, or a combination of variables.
Key parties in involved.
Borrower: On pre-financial closure, the borrower needs to negotiate and coordinate with the arranging banks and facility agent. The borrower can be a body Corporate, Government etc.
Lenders: The lenders are typically financial institutions such as commercial banks who come together to form a syndicate and provide funding to the borrower. They usually originate and structure the facility for the Corporate/client looking for funding. The originating state of a transaction involves the lenders spotting opportunities, and supporting clients to explore various funding options to meet corporate needs and strategy. Structuring the transaction involves helping the client to understand the deal dynamics, and cheaper funding sources, thus leveraging on Export Credit Agencies (ECAs) options to mitigate potential risk and reducing pricing, sinking fund provisions and escrow arrangements. Usually, Non-Disclosure Agreements (NDAs) or commitment letters are signed by lenders who want to participate in such loan transactions.
Facility Agent. It will not be wise for each lender/bank to approach the borrower at any point in time. The facility will have to be administered by an Agent Bank (typically one of the arrangers) acting on behalf of the syndicate of lenders to simplify dealings with the borrower. Its role is an administrative one, managing the communication and money flow between the lenders and the borrower. With such a critical role in a syndicated transaction, it is very important to set out the scope of its role and duties very precisely in the facility documentation.
Legal Counsel: The role of both internal legal counsel and external legal counsel cannot be over-emphasized. The lead counsel would be expected to assist in the negotiation of the provisions of the credit documents and to review drafts of, and approve the final copies of, the closing documents. Legal is the subject matter expert and must ensure the Legal enforceability of the documentation.
Time to closure.
One major hindrance preventing borrowers from engaging lenders on syndicated transactions is the time amount of time it takes to close a deal. It can take several months especially when the number of lender banks is a lot. I have tried to summarise the key of the steps of the primary loan.
Thankfully, the LMA which is primarily Europe, Middle East and Africa focused, continues to make efforts to promote syndication across the industry which helps to reduce the turnaround time on loan syndication deals. There is also the need to emphasise the secondary market activities. Basically, after primary syndication is complete, a lender (bank) may want to trade its position in the loan. This may be due to several factors including the current interest rate regime. The LMA produces standard form documents to aid the distribution of the loan in the secondary market.
In summary, syndicated loan deals expose one to different work streams and deal with different kinds of people in the process. This helps to build the requisite knowledge on how to handle on the job some of these transactions. The next time you pitch a transaction, I want to believe that, reading this article will empower you to demonstrate your capability to handle the transaction end to end. Many thanks for reading.
–
Disclaimer: The views expressed are personal views and don’t represent that of the media house or institution the writer works.
Credit and References: Miriam Amoako, Loan Market Association
About the writer
Carl Odame-Gyenti, PhD is the author of Dare to Dream book, a Financial Institutions Coverage and Fintech expect working with an International Bank in Nairobi, Kenya, East Africa. Contact: Carl.odamegyenti2@gmail.com, Cell: +254 70 5459061