When a borrower, who could be developing an amusement park or a corporation planning a dry waste management plant or laying an oil-pipeline under the sea, with large funds requirement approaches a Merchant Banker who, in turn, reaches out to Banks and Financial Institutions for arranging finance for the project. That group of lenders offering funds on shared basis, is called as a Syndicate, and funds thus arranged is called as Debt Syndication.
Debt syndication involves
* Estimation of aggregate fund requirements of the Corporation
* Preparing a Financial Plan for the entire loan requirement
* Negotiating with the Banks and Financial Institution commercials, term, credit facility
* Shortlisting the Banks and Financial Institutions
* Securing Loan Application and getting sanction from Banks & FIs for their share
* Completing legal documentation and administrative requirements
Advantages of Debt Syndication
There are regulatory restrictions on the amount of funds one Bank or FI could lend to single borrower. If the fund requirement of the borrower is large enough it would not be possible for one Bank/FI to approve the loan. Here, merchant banker plays the role of arranger by approaching multiple Banks and Financial Institutions to get consent for the loan proposal. Banks and Financial Institutions also benefit from the syndication due to funds getting divided among lenders, thereby mitigating credit risk of each of the lenders.
Parties associated with the debt syndication
* The borrower is the Corporation/Institution/Sovereignty that requires large funds.
* The arranger is the merchant bank that is first approached by the borrower. Merchant Banker get in touch with lenders to set up a syndicate.
* The co-arrangers are first group of lenders who agree to the syndication proposal.
* The co-lenders are the Banks and Financial Institutions who agree to take a share in the overall funds requirement.
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