Introduction to Syndicated Loan
Syndicated loans are loans offered by a group of lenders – referred to as a “syndicate” – that work together to provide funds for a borrower. Subject to the pricing provisions for financial institutions being arrangers, agents and security agents of the given financing, the same terms and conditions apply to all of the lenders in the syndicate, and there is only one loan agreement.
Syndicated loans are usually granted by banks or institutional investors such as pension funds and hedge funds to large companies and involve the raising of large amounts of money from multiple lenders. They allow lenders to take part in financings which may be too large for a single lender to assume and to spread the risk of default of the borrower.
Syndicated loans are also used in leveraged buyouts to fund large corporate takeovers with primarily debt funding.
The main features of syndicated loans are:
- There is only one facility agreement and all conditions apply usually to all lenders (regardless of whether they are the original lenders or join the financing in the further stage of syndication)
- There are several lenders which might have different participations in the facility
- They are long-term loans, typically for substantial amounts
- Interest rates can be fixed or floating, based on a benchmark rate such as the EURIBOR or LIBOR.
The ultimate purpose of syndicated loans is very different, but we can highlight the following:
- Large investments requiring a considerable capital outlay
- Debt restructuring. Companies that are going through financial difficulties and want to restructure or renegotiate their debt.
- The loan can involve a fixed amount of funds, a credit line or a combination of the two.
This type of loan tends to be formalised in relatively extensive documents, usually based on LMA standard forms, that regulate at length the different situations that can arise during the lifetime of the loan.
Facility agreements contain boilerplate provision such as:
- Triggers that need to be complied with for the disbursement of funds. It is common for the funds available in a syndicated loan to be divided into several tranches, each having its own specific set of disbursement conditions.
- Voluntary and mandatory prepayment provisions such as in the event of change of control
- Financial covenants that are tested throughout the lifetime of the facility which enable the lenders to check the borrower’s financial condition.
- Undertakings (such as: limitations on acquisitions, limitations on disposals, limitations on loans/guarantees to third parties and members of the group, negative pledge, limitations on indebtedness, limitations on distributions/payment of dividends, limitations on share issuance, hedging requirements, pari passu ranking and information undertakings)
- Events of default provisions (cross default, litigation thresholds, material adverse effect clauses and insolvency)
- Rights and obligations of the agent.
It is usual for financial entities from different countries to participate in this type of transactions. For this reason, syndicated loans are usually drafted in English and based on the LMA standard prepared for the given type of financing.
They are normally subject to English law but may be governed by the law of another country if the parties so decide.
In some syndicated loans, besides the facility agreement there can be an intercreditor agreement which regulates the relationship between the lenders and security documents securing the loan repayment.
Besides the advantages described in general at the beginning of this paper, the following additional points could be added:
- Governing law: syndicated loans can be governed by any law chosen by parties
- For Borrowers: syndicated loans can be used by a wide range of companies such as mid-sized unlisted and unrated companies
- Financing volume: syndicated loans can be issued for either smaller (EUR 10M) or bigger amounts (EUR 2,000M), although most deals range between: private rating < EUR 750m (debt size), public rating > EUR 750m; and
- For investors: investors can easily find funding even for the large investments as the maximum amount of loan is usually divided into smaller tickets of the particular syndicated banks.