This is also called a syndicated bank facility.
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks. These are called lead arrangers who work together to provide funds to a single borrower.
The loan can go to a corporation, a large project, or a sovereign government. This can come as a fixed amount or a credit line. Often, it is a combination of the two.
Syndicated loans are used when when a project is too large for a single bank or financial institution to fund. It can also occur when some specialized lender is required for a specific asset class.
This helps the lenders to spread the risk among the different firms involved. There is also the presentation of investment opportunities that normally would be out of range due to the limit of the capital available.
Interest rates can be either floating or fixed, depending upon what is best for all parties involved. This tends to be based upon LIBOR since many of these deals tend to have international participation.
The lead arranger is the head investment bank or underwriter in a syndicate loan. This firm is paid a fee by the borrower to arrange for the financing. The amount paid will depend upon the complexity of the deal. Risk factors are also taken into account when determining what to charge.
The deal is then doled out to other underwriters. These are the parties that get the money raised by placing the deal with the proper firms.
Under such a scenario the arranger is responsible for the deal and getting it funded. When dealing with hundreds of millions of dollars, that is too much risk for most entities. This is why it is spread out.
The arranger is the one who puts to together the syndicate.
Underwritten Deal - here is where the lead arranger guarantees the monetary commitment. If they do not get the syndicate to fund the entire deal, it will absorb the difference and later sell the rest to investors.
Best Effort - this is becoming more commonplace. Here the underwriter makes the best effort to get the deal funded. If it is undersubscribed, then the credit might not be issued or there could be changes in factors such as interest rates.
Cub Deal - $50M-$125M with a cap usually being $150 million. This is a close group of institutional investors (and banks) in the syndicate to put together the deal, with all usually sharing in the fees.
This always ties back to the fact that because they involve such large sums, syndicated loans are spread out among several financial institutions, which mitigates the risk in case the borrower defaults. It is the case no matter how the deal is structured.
