Syndicated loan

What it means

A syndicated loan is a large loan provided jointly to one borrower by a group of banks under a single loan agreement. One bank acts as agent, coordinating drawdowns, payments and communication with the borrower, while the other banks fund an agreed share.

The banks thus share a risk that would be too large for a single institution, and the company obtains an amount no single bank would lend it. Syndication is common in acquisition finance, project finance and large investments.

The loan may have several tranches, for example a term loan for investment, a revolving facility for working capital and a guarantee line. Terms often follow international standard documentation, which eases negotiation between banks and allows participations to be sold later.

How it works in practice

For the company, a syndicated loan is more complex and costly to arrange than an ordinary investment loan. Besides interest it pays an arrangement fee, an agency fee and legal costs. It therefore makes sense for large amounts, where one set of documents is better than several bilateral agreements.

The agreement contains extensive covenants, such as leverage and debt service coverage limits and restrictions on dividends or further borrowing. The company must regularly deliver financial statements and compliance certificates, so it needs reliable and timely bookkeeping.

The loan is usually backed by a package of security, such as charges over property, receivables, accounts and shares, sometimes with guarantees from group companies. The security is typically held by a security agent on behalf of all banks in the syndicate.

What to watch out for

Changes to the agreement, such as a waiver of a breached covenant, require consent from a set majority of banks and, for fundamental changes, from all of them. Negotiating with many banks takes longer, so problems meeting the terms should be raised with the agent early.

For larger companies, issuing bonds can be an alternative that widens the investor base and sometimes offers looser terms. The choice between a syndicated loan and bonds depends on the amount needed, the flexibility required, the costs and the willingness to disclose information.