Loan Syndication

Hemlata Jain

 Project finance-in form of rupee & foreign currency loan for new units, expansion, diversification & modernisation. Sources of funds for DFIs- bond issue mostly long term bonds Disbursement trends-pvt sector has progressively reduced their dependence on institutional funds Alternative option available to companies in the form of issue of shares at prem, pvt placement of debentures, GDRs, internal generation of funds

 Term loans-from DFI, DB, IFCI, SFC constitute about 10% of sources of funds for corporates. Dev Fis: IDBI-estd 1964 under Act of parliament- provides direct fin assistance to large & medium ind units, small ind sector having been transferred to SIDBI. ICICI-estd 1955, public ltd co to encourage & assist ind units in the country-provides term loans in Indian & foreign currencies, underwrites issues of shares & debentures, makes direct subscription to issues & guarantees payment for credit undertaken

IFCI-set up as statutory fin corp in 1948, recently converted into a public ltd co to give flexibilty to its operations-provides project finance & promotional services. SFCs-set up under SFC Act 1951, 18 SFCs at present- term loan assistance to small & medium enterprises, direct subscription to equity/ debentures, discounting of bills & guarantees, equity type assistance under special capital & seed capital schemes to entrepreneurs having viable projects but lacking adequate funds of their own.

 SIDBI- estd 1989-IDBIS o/s p/f totalling 4000cr transferred to SIDBI on 31-3-1990 apex bk for tiny & small scale ind.-principal Fi for promotion, financing & dev of ind units in SSI sector. Also coordination of functions of institutions engaged in promotion, financing & developing ind concerns in SSI sector. Equipment finance for modernisation & technology upgradation of existing units. Refinance to comm bks under Automatic Refinance Scheme (limit raised from 10 to 50 lacs & refinance enhanced from 75 to 90 % of term loans.

 SCICI (shipping credit & invst co of India)-estd 1987 by ICICI for dev of shipping, fishing & related ind including aquaculture, hatchery, fish processing, on & off shore oil survey, exploration & production, food processing & associated infrastructure facilities-merged with ICICI w.e.f. April 1, 1996. TFCI- sponsored by IFCI- estd 1989- to sanction project loans, lease assistance & direct subscription to shares-conventional tourism projects & non conventional ones like amusement parks, car rental services, air taxi passenger facilities, UTI, LIC, GIC, IRBI, Comm Bks

 Borrowings from Fis- MB help clients approach Fis for term loans which Fi to be approached depends on ind, location of unit & size of project cost. All India Fis projects above 10cr SFCs-upto 1.5 cr SIDCs upto 90 lacs

 FOREIGN CURRENCY LOANS-Eurodollar loans, Japanese yen loans, Deutsche mark Revolving Funds provided by Fis wherever imported mach & equip necessary covers CIF value of capital goods & know how fees- int rates depends on rate applicable to foreign currency funds utilised by Fis Fixed rate loans in US $-10% p.a DM-9.5% p.a. SF- 8% p.a. Floating rate loans linked to LIBOR- 1.5%over LIBOR

 All india Fis operate ERAS (exch rate adm scheme) to cover risk of foreign exc rate fluctuations charge composite rate to borrower & carry risk themselves rate is 23-26%, effective rate is 23%, a commitment charge of 1% on amt not drawn.

MB to appraise project viability- then design capital struc choice to be based on cost of capital & ability of unit to yield reqd rate of return.

 Promoters contr-20 % of project cost. A areas & projects promoted by techno-entrepreneurs17.5%, project above 25 cr-12.5% B areas- 17.5% C areas- 20% Concessional norms at discretion of FI-if promoters have resources or project risk high- higher promoter contr may be insisted If promoters unable to bring contr, if deserving case (qualified or experienced entrepreneur)- seed capital assistance of SFC, IDBI RCTC & SIDBI from 10-30 lacs depending on size of project & promoters contr upto max 15 lacs. Promoters contr may be in form of subs to capital, unsecured loans, right issue sh, convertible deb issued as rights to existing holders & cash accruals in case of existing co.

 Priority to projects in infrastructure, agri & rural dev, in backward areas, export oriented, export intensive, import substitution, indigenous & advanced technology, new material, modernisation, energy conservation & those promoted by new entrepreneurs, technocrats & NRIs Project ve listCigarettes,other tobacco products, alcohol, toilet & cosmetic preparation, powerlooms, plywood,calcium carbide, conveyor belting, new jute mills.

 After determining eligibility to term loan, preliminary meeting fixed with FI, if it agrees to consider loan proposal, application with req details to be submittedpromoters background, technical skills, relevant experience & fin soundness. With loan app: MOA, AOA, COI, latest annual report/ statement of accounts to be filed. Also, documents of guarantor co, if loan is guaranteed.

 Cash flow statement for 7-10 yrs Land for project, plan for bldg, quotations of mach. Obtained from atleast 2. WC to be estimated, comm bk to be approached MB would make due deligence statement

 Final structure of financing emerges after considering promoters contr, DE ratio, DSCR & security margin Promoters contr- 20%, DE 3:1 for small ind units & 2:1 for large & medium units. DSCR- used to measure payment of int & principal within the stipulated time-gross cash accruals should normally be 1.6 to 2 times to assure that project has inherent strength & potential to service debt. Security margin-term loan sanctioned against security of fixed assets leaving adequate security margin.

 Term loans granted subject to foll conditions: land (as security)- encumbrance free Ins of assets- bldg & mach separately Scrutiny of AOA- should not contain any restrictive clause against covenants of Fis Lien on all f.a. Personal & corporate guarantees of major sh holders & associate concerns Promoters undertaking to finance fund shortfalls/ cost overruns, non-disposal of holding for 3 yrs DFIs approval of- appointment of mgt personnel, further cap exp, dividend payment, bonus issue

 Req to be met after loan is sanctioned Acceptance of terms & conditions Deposit of legal charges Details of plot or land for project, title deeds of land Gen body resolution for creation of charge over assets, legal documents creating charge Personal guarantees & undertakings, IT & WT clearance of promoters & directors Pollution clearance architects & auditors certificate for civil cons.

 Before loan disbursement, documents to be executed & submitted, stamp duty & reg fees paid, subscribed & paid up capital to brought in by promoters, creation & registration of charge on present & future assets of co After req complied, disbursements made on basis of assets created at site. Security to match every disbursement starting with land & bldgs Balance after security margin paid by DFI, term loan disbursed at 75% of value, cheque made in name of supplier. In large projects, disbursements are need basedpromoters to bring in their entire contr first

 In some cases- bridge loan granted against bk guarantee. Loan syndication- borrowing from single DFI restrictive, loan syndication used as alternative to consortium lending, benefits reaped are amt, tenor & price, efficient pricing, corporate borrower does not face rigid terms( take it or leave it) situation Cost of syndication to vary with credit risk- high credit standing ensures best terms E.g.,SBI & Canara bk- experience in loan syndication-

 In loan syndication, borrower approaches several bks willing to syndicate a loan, specifying amt & tenor of loan. On receiving query, syndicate or lead bk looks around for bks willing to participate in the syndicate after competitive bidding procedure, mandate to organise the loan awarded by borrower to 1 or 2 major bks lead bk to syndicate loan on firm commitment basis or on a best effort basis on receiving mandate from borrower, lead bk prepares placement memorandum to mkt loan to other bks it helps bks understand the transaction & provide inf about borrower-bks use the memorandum for inf about the borrower & the transaction, make reasonable appraisal of credit & decide about participation in the loan.

 If bk decides to become a member, it indicates amt & price it will charge on the loan On receiving inf from all the bks, lead bk prepares common document to be signed by all members of syndicate & the borrowing co borrower signs only 1 document but shares separate contractual relationship with each member Agent or lead bkr attends to all adm wk.- agents fees yearly charge Syndicated loan would have a funded component/core component on which int charged on loan & stand-by loan. Int on stand by portion charged on amt withdrawncommitment fee charged on unutilised portion. Int charge may be fixed or floating

 Syndication document- provision on tenor, int & repayment; prepayment clause specifying occasion on which it is permitted, representations & warranties about borrowers; biz health; compliance with laws, regulations, tax provisions; default accelerating loan repayment; agency clause; fixed or floating charge on assets; security, pledge, hypothecation of assets for WC.

Loan syndication: external

Gulf crisis- indias credit rating fell below invst grade-put limits on ECB Predominance of short term borrowing & withdrawal of NRI deposits led to net outflows under ECB BOP crisis successfully handled, implementation of structural reforms since july 1991 restored investor confidence. GOI does not permit large expansion of comm debt- keeps close watch to keep it within manageable limits.

 Procedure for approval approval of dept of economic affairs necessary for all credit proposals where loan taken directly from foreign lender by borrower as actual user of loan or by a fin intermediary signing a framewk credit agreement. In latter case, sub borrowers do not need separate approvals from the govt Applications to contain the foll details approval for import from relevant authorities where such approval reqd details of offer from 1 or more lender details of contact person/ office with tel no to enable quick reference to be made, if clarifications are needed.

 Approval letter will be issued by ECB Div of Dept of Economic Affairs, Ministry of Finance. Eurodollar mkt: Consists of int bks, fin cos, forex bks & special institutions. Gen fund availability on an av about $500 billion- recession in advanced ind countries depressed mkts Loans were initially granted to corporate customers going multinational- they were big, well known & of good standing. With passage of time, borrowers included virtually unknown firms due to massive flow of funds into the mkt Govt & govt related borrowers resorted to medium euro credit mkt for ind & infrastruc projects & to fin BOP deficits. Also, int fin inst like World Bk are regular borrowers.

 Eurodollar mkt not constrained by funds availability like national mkts adopting credit rationing. Also, firms raising funds in Eurodollar mkt can deploy anywhere till lender is satisfied that loan servicing is not affected. Loan syndication: Need: large size of loans, wide variety of bks, diversification of sovereign risks arising in int lending. Procedure: 3 level of bks- lead,money & participating. Lead bk assembles mgt grp of other bks to u/w loans & mkt shares to other participating bkscompetitive bidding- borrower awards mandate lead bks sh of loan atleast as large as any other lenderplacement memorandum prepared-bks appraise credit participate in the loan50 to 70% sh of initial u/w is lead bkrs- loan size $500,000 to several bnnormal duration 6 wks- even 15 days when loan small or borrower familiar as terms & placement memo can be settled quickly-

 Club loans-funded by lead bk & managers- no placement memo prepared- small loans to frequent borrowers- in pds of mkt uncertainty when MNC bks not willing to do biz Pricing of eurodollar loan- rollover credit pricing usedlibor & spread (1/8% to 1.5 %) -also praecipium, commitment fees, front end fees, annual agents fees- 1/8%, 0.5%, 0.5%to 1% respectively. Front end fees include participation & mgt feesparticipation fees divided among bks in proportion to sh in loan, mgt fees divided between u/w bks & lead bks. Agents fees- yearly charge-may be about $10,000 p.a.

 Annual charges-(libor + spread) * multiplied by amt of loan +praecipium * amt of loan + commitment fee * amt of loan undrawn + annual agents fee Front end chargesparticipation fee * amt of loan mgt fee * amt of loan + initial agents fee, if any e.g. loan $100 mn, term 7 yrs , no grace pd, libor 10%, price 100 basis pt above libor

 Compared to domestic FI loans, eurodollar loan agreements simple- contain fewer restrictive covenants Loan document contains clauses covering pricing, int payment dates & amortisation dates, obligations of the parent co in case of loan to MNCs, cross default clause stipulating that loan in default when parent co defaults on its loans International character of the loan-1) jurisdiction: Borrower in 1 country, booking of loan in another country, funding in yet another country- New York often chosen 2) judgement currency clauses- courts in several countries render judgement in domestic currency only

 Place & method of payment- affected by means of transfer of funds from 1 bk to another in country of the currency in which loan denominated- borrowers normally receive funds in place of their choice Guarantee clause-syndicated loans have no collateralbk guarantee reqd & bk should satisfy capital adequacy norms Res req clause-when subject to central bk jurisdiction, lending bks in eurodollar mkts are free of any res regulations imposed. This clause stipulates borrower has to absorb any additional cost the lender incurs when res req are imposed Lending bks req payments of principal & int free of taxes

 Euro dollar availability clause- permits bk to call for pre payment if sufficient dollar fund not available. Eurobonds- duration: 10- 15 yr. bonds issued by borrower of nationality diff from country of capital mkt in which securities issued. u/w & sold in more than 1 mkt simultaneously thru int syndicates Cos & govt prefer bk loan or syndicated loan rather than tap int bond mkt- loans cheaper & large amt can be raised- largest int bond not exceeded $ 100 mn but a syndicated loan goes well beyond US $ 1 bn. Also, loans more flexible than bonds & allow for switching of currencies & early payment Medium & long term credits are priced on a short term rollover basis.