What is Loan Syndication?
Loan syndication is the process of involving a group of lenders in funding various portions of a loan for a single borrower. Loan syndication most often occurs when a borrower requires an amount too large for a single lender to provide or when the loan is outside the scope of a lender’s risk-exposure levels. Thus, multiple lenders form a syndicate to provide the borrower with the requested capital.
The agreements between lending parties and loan recipient often need to be managed by a corporate risk manager to reduce misunderstandings and to enforce contractual obligations. The primary lender conducts most of this due diligence, but lax oversight can increase corporate costs. Company legal counsel may also be engaged to enforce loan covenants and lender obligations.
How Loan Syndication Is Used In Corporate Financing
Loan syndication is often used in corporate financing. Firms seek corporate loans for a variety of business reasons that include funding for Mergers, Acquisitions, Buyouts, and other capital expenditure projects. These types of capital projects often require large amounts of capital that typically exceed a single lender’s resource or underwriting capacity.
Loan syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because the associated risks are shared with other lenders. Each lender’s liability is limited to their respective share of the loan interest. Generally speaking, with the exception of collateral requirements, most terms are uniform among lenders. Collateral assignments are generally assigned to different assets of the borrower for each lender. Usually, there is only one loan agreement for the entire syndicate.
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