Within the corporate loan market, it’s worth knowing that the Loan Syndications and Trading Association (LSTA) is the main resource centre. It can bring together loan market participants, provide market research, and has the ear of the authorities in terms of influencing compliance procedures and industry regulations.
The main roles operating within a syndicate are (with much differing of opinion as to precise function):
Mandated lead arranger (MLA)
Usually takes a significant portion of the syndicated loan commitment, selling parts of the debt to build the syndicate.
Advises the client, organises and arranges the loan, negotiates the broad terms, and often underwrites the loan (see below).
Day-to-day management of the transaction, liaising between banks and borrower. The task can be broken into facility agent (managing the day-to-day running of the loan itself and compliance with its terms) and the trustee who manages documentation and holds any securities required.
A decision will be taken with the arranging bank as to whether the loan will be underwritten. In an M&A deal, for example, certainty of funding may be essential. If so, the borrower knows it will receive the full amount of the loan, irrespective of whether the arranger has successfully syndicated the deal. If the arranger fails to fully subscribe the loan, it must take on the difference (which it can later sell on to other investors). Underwriting is a competitive tool to win mandates and it generates more fees.
Without underwriting, a best effort arrangement means the borrower receives only as much as can be generated amongst participants. Undersubscription can mean the loan may not close or that it needs major changes to create market interest.
Fees associated with the loan can include the following:
Margin: lenders will charge a margin over an agreed market benchmark.
Commitment fee: where a loan is not fully drawn, borrowers will be charged a commitment fee to maintain it
Utilisation fee: banks may charge an additional fee if a high proportion of the loan is drawn in one.
Arrangement fee: the arranging bank normally receives a fee once the syndication has been successfully completed. This depends on the size of the syndication and the credit risk. Occasionally other lenders will receive an upfront fee of a few basis points for participation in the syndicate.
Legal fees: companies will have to meet the costs of their legal advisors.
In practical terms, treasury must begin with a clear understanding of the role the loan will play in the company’s wider funding strategy. This provides a focal point when the company presents its case to potential investors.
Syndicated loans can be structured in many different ways. Treasurers will also need to pre-arm themselves with accurate forecasting data, especially covering future funding requirements; only this way can appropriate terms and conditions be agreed. A repayment strategy will also need to be outlined.
Of course, the arranging bank’s expertise and market influence are vital but so too is strength of the relationship, which can play a key part in making the decision as to which bank to mandate.
Negotiations will be ongoing throughout the arrangement process and it is therefore important to understand what the other side wants. Treasurers must identify each potential lender’s approach to, and appetite for, syndicated loans. Points of discussion might include:
The type and size of banks involved and whether they will sell their participation right away or take a longer-term view.
The importance of the relationship to each party.
The proposed structure of the deal.
Covenants or other restrictions that might conflict with policy.
Deal complexity will influence timing but the key driver on the corporate side for delivering a syndicated deal is the underlying transaction. For M&As, speed may be of the essence, less so a refinancing requirement. Typically, from initial meeting with the agent to signing the loan agreement it can take two to three months.
For primary lenders, an important factor is the secondary market, where exposure to the syndicated loan can be managed by selling on part or all of a bank’s participation in a syndicated deal. Secondary market deals represent work (and therefore fees) for the agent as each deal requires contract documentation to be drawn up and all the proportions for monetary calculations to be changed.
Most transfers are made ‘by novation’, in which case the new lender becomes a ‘lender of record’. In these circumstances, the new lender simply replaces the original lender. The original terms and conditions apply, with the only change relating to which bank receives the interest payments.
The key factor in all cases is that the bank’s ability to sell loans in the secondary market reduces the counterparty risk associated with the decision to participate in the syndication. As a result, the secondary market enhances liquidity in the syndicated market.
What is sometimes less well understood is the importance of the secondary market for borrowers. For the corporate borrower, the development of the secondary market has also enhanced liquidity in the primary market, arguably bringing down margins for all borrowers.