Syndicated Loans

Syndicated Loan
JLR, which was acquired by Tata Motors from Ford Motor for $2.3 billion in March 2008 In Oct. 2009, it secured 500m of new finance, including a 175m loan with the State Bank of India. The company has also won a $90m (57m) export financing facility with ABC International Bank. The remaining funding has been made with Standard Chartered, Bank of Baroda, and Burdale Financial Limited, a subsidiary of the Bank of Ireland

Syndicated Loan - Definition

A syndicated facility is a lending facility, defined by a single loan agreement, in which several or many bank participate

Why Syndicated Loan?

A borrower wants to raise relatively large amount of money quickly and conveniently The amount exceeds the exposure limits or appetite of any one lender Borrower does not want to deal with a large number of lenders

Syndicated loan - market

One of the largest markets Most flexible market Size 1980 - 88 bn 1989 - 736 bn 1999 - 1800 bn 2004 - 3200 bn

Global Syndicated Loan Markets

Category of borrowers Coporates Financial institutions Others Regionwise USA EUROPE Asia Pacific Others
75% 20% 5% 60% 30% 5% 5%

Global Syndicated Loan Markets

Market & Centre

1. US Market - New York 2. European Market - London 3. Asian Market Hong Kong

Syndicated Loan - Features

Two or more banks (the syndicate of Lenders) contract with a borrower to provide credit on common Terms and conditions Governed by a common document. Multi-bank transaction, each bank acting severally. Although common documentation, a bank has ultimately, the individual right to take legal action against borrower

Syndicated Loan - Features

Interest usually accrues at a variable or floating rate and is reset periodically, at agreed intervals, usually at borrowers choice. Usually of medium term maturity, 3-10 years. Banks participate on common terms and conditions, but not necessarily in equal amounts

Borrower Under writer Lead bank/Manager

Bank A

Bank B

Bank C

Lead Manager
The bank that is awarded the mandate by the prospective borrower It is responsible for placing the syndicated loan with other banks and It ensures that the syndication is fully subscribed Eligible for arrangement fee

Underwriting bank
Bank that commits to supplying the funds to the borrower if necessary from its own resources if the loan is not fully subscribed Risk factor Loan may not be fully subscribed Not all syndicated loans are underwritten

Participating bank
The bank that participates in the syndication by lending a portion of the total amount required Interest income and participation fees

Participating bank
Risks

Credit risk of the borrower normal Participating bank may be led to into passive approval and complacency (when many high profile banks cannot be wrong?) Funding risk: mismatch of inflows and outflows

Advantages to the Borrower

Dealing with single bank - Single contact point & Single set of documents Access to large amount of funds Sophisticated investor base

Advantages to the Borrower

Relatively lower price & finer terms and highly flexible
Access to wide range of banks Greater speed & reasonable certainty of obtaining funds simpler than other ways of raising capital ( issuing of bonds or equity)

Advantages to the lead bank

Arrangement fees income without committing capital

Enhancing banks reputation

Enhancing the banks relationship with the client

Advantages to participating banks

Diversification of risks (exposure norms prescribed by Central Banking authority) Access to lending opportunities with low marketing cost Opportunities to participate future syndications

Advantages to participating banks

In case of borrower runs into difficulties, participant banks have equal treatment no disadvantage of the size vis--vis dominant bigger banks Recognition Return by way of interest & fees Transferability

Instruments
Term Loans Revolving Credit Standby Facility

Stages..
The Prospective Borrower May Liaise With A Single Bank Or It May Invite Competitive Bids From A Number Of Banks. The Lead Bank Needs To: Identify The Need Of The Borrower Designing Appropriate Structure Develop A Persuasive Proposal On Approval Award Of Mandate

Pricing..
Interest Spread Depends Upon :
Risk -Whether Sovereign Or Public / Joint Venture Or Private Sector Industry Or Activity Of The Company Credit Rating Of The Country

Credit Rating Of The Borrower/Group

Period / Average Life Of The Loan - 3-5-7 Years? Repayment/ Structure - Whether Bullet Or Amortisation?

Term Sheet ..
Reserve clause - increased cost revision of
interest rate

Default clause right to recall paripasu charge Jurisdiction for settlement of disputes Availability of draw down subject to availability of
funds

Key documentation clauses Material adverse change clause - negative lien Expiry date

Documentation..
Preparation by Law Firm Incorporation of Terms Specific /
General role of each party clearly defined

Revision, Negotiation & Finalisation LMA Recommended Form of Primary Documents

(Loan Market Assn, London)

Secondary Market Transfers..

WHY:

Liquidity & Trading Profits Exposure Management Reduction & Diversification of Risks Regulatory Constraints

Asset Building and Relationship

Thank you