Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Loan Syndication

What it is:

Loan syndication is a lending process in which a group of lenders provide funds to a single borrower.

How it works (Example):

When a project is unusually large or complex, it may exceed the capacity of a single lender.   For example, the amount of the loan may be too large, the risks too high, the collateral may be in different locations, or the uses of capital may require special expertise to understand and manage it.  In these cases, a financial institution may bring other lenders into the deal. 

Usually, the loan syndication limits the liability of each lender to its share of the loan interest.  In this way, each lender limits its loan amount to a manageable size, and limits its risk exposure. Additionally, each lender may have a collateral interest in a unique or specialized asset from the borrower, such as a piece of equipment.

Loan syndications involve a large amount of coordination and negotiation.  Typically, loan syndications involve a lead financial institution, or syndicate agent, which organizes and administers the transaction, including repayments, fees, reporting and compliance, and loan monitoring.  Often, such transactions require the services of a specialist who syndicates the loan on behalf of the borrower; identifying lenders while negotiating terms and conditions, and even representing the borrower throughout disbursements.  Loan syndication fees can be expensive, ranging from 5% to 10% of the loan principal.

Why it Matters:

Loan syndications can be a useful tool for banks to maintain a balanced portfolio of loan assets among a variety of industries.  If one loan is too large, it may overweight the bank's portfolio.   Therefore, banks may pursue a syndication to accommodate a loan and keep its portfolio in balance.  At the same time, loan syndications may incur a large expense to the borrower.  While the syndication fee is usually financed, the burden of repaying the loan and syndication fee is shouldered ultimately by the borrower.