Syndicated loans are almost always arranged for large, complicated projects involving large companies or governments. In a standard example, the borrower wants to implement a very specific type of large project and cannot find any lender with the capital or expertise for evaluation and financing. The borrower turns to a group of money lenders, organized as a syndicate, to finance and oversee joint Pamela Andrewsijk’s project.
An arranger is required in most syndicated loans. The arranger is normally one of the larger banks or funds involved in the syndicate and is responsible for facilitating communication and distributing payments.
Developments in the syndicated loan market
The first syndicated loans were used in Mexico and Latin America to help sovereign governments or to facilitate larger acquisitions. They offered a way to link riskier loans to institutional capital providers.
In the 1990s a shift arose with the emergence of collateral loans or CLOs. This trend continued until the financial crisis of 2007-2008. After the crash, liquidity disappeared in the syndicated market, especially for the leveraged junk loan market.
Types of syndicated loans
Syndicate loans come in three main forms. The most common outside of the United States is the guaranteed deal, where the lead arranger, sometimes called the lead bank, guarantees the full loan and is responsible for the syndication of the deal. The processor receives service costs from the other institutions involved.
Another type of syndicated loan is called the club deal. These are reserved for relatively small syndicated loans of less than $ 100 million. In a club deal, all lenders retain an approximately equal degree of influence and responsibility.
In the United States, the best effort deal is the most common. With a syndicated loan with the best efforts, the lead registrant does not endorse the entire loan. Instead, part of the loan is no longer enrolled and can be completed by other parties, depending on market conditions. If the loan retains a canceled portion, the borrower must accept the smaller amount or cancel the agreement.