International Lending

INTERNATIONAL LENDING
Syndication of Loans: As the size of the individual loans increased, individual banks found it difficult to
take the risk sin le handed!re ulator" authorities in #ost countries also li#it the size of the individual e$%osures& 'ence the %ractice of invitin other banks to %artici%ate in the loan, to for# a s"ndicate, ca#e into bein ( thus the ter# )s"ndicated loans*& A loan s"ndicate refers to the ne otiation +here borro+ers and lenders sit across the table to discuss about the ter#s and conditions of lendin & A s"ndicated credit is a loan in +hich a rou% of financial institutions #ake funds available on co##on ter#s and conditions to %articular borro+ers& The tenor of such loans ran e fro# ,!- "ears& .ost of overseas borro+in takes %lace throu h the s"ndication route& /hen borro+er*s re0uire#ent for loan is lar e a bank #a" seek to attract other banks to #ake the loan 1ointl" as a s"ndicate usin co##on loan docu#entation& This %rocess is kno+n as 2 s"ndication3& 4"ndication +orks on the %rinci%le of risk s%readin i&e& the credit risk is diversified a#on st the lenders& 4"ndication benefits the lenders and the borro+ers& At %resent, lar e rou%s of banks are for#in s"ndicates to arran e hu e a#ount of loans for cor%orate borro+ers& The need for s"ndication arises as the size of the loan is hu e and a sin le bank cannot bear the +hole risk of lendin & Also the cor%orate borro+ers are not sure that +hich are the banks +illin to lend the#& 'ence, s"ndication assu#es si nificance& Thus in case of s"ndication, risk ets diversified& The %rocess of s"ndication starts +ith an invitation for bids fro# the borro+er& The borro+er #entions the funds re0uire#ent, currenc", tenor etc& The #andate is iven to a %articular bank or institution that +ill take the res%onsibilit" of s"ndicatin the loan b" arran in for the financin banks& 4"ndication is done on a best effort basis or on under+ritin basis& It is usuall" the lead #ana er +ho acts as a s"ndicator of loans& The lead #ana er has dual tasks i&e& for#ation of s"ndicate docu#entation and loan a ree#ent& The %artici%atin banks si n co##on docu#entation on the co##on ter#s and conditions& Thus, the advanta es of s"ndicated loans are the size of the loan, s%eed and certaint" of funds, #aturit" %rofile of the loan, fle$ibilit" in re%a"#ent, lo+er cost of funds, diversit" of currenc", si#%ler bankin relationshi%s and %ossibilit" of rene otiation&

Lecture Notes Prof. Rahul Shah (M): - + ! "#"$ %&%#'

International Lending

(d)antages to Lenders and *orro+ers: One of the reatest advanta e to a lender is that the s"ndicated loans enable the banks
to diversif" their risk due to %artici%ation b" other lenders& This results in #iti ation of credit risk and e$%osure to a %articular borro+er& There is co##on docu#entation a reed u%on b" the lenders, +hich #ini#izes the ti#e& There is co##on %latfor# and unifor#it" to the lenders +ith res%ect to docu#entation, a#ount, interest etc& It hel%s even s#all banks to %artici%ate in such lendin %rocess& 4"ndication hel%s the borro+er havin lar e credit re0uire#ent that cannot be #et b" an" individual bank& This saves the borro+er fro# ne otiatin the deals +ith several lenders& In case of loan s"ndication, the borro+er needs to ne otiate the ter#s of loan +ith %erha%s a sin le bank or entit" and et the total loans sanctioned on si#ilar and unifor# a reed ter#s& This results in savin of cost and ti#e on docu#entation& 5urther, the borro+er can et the loans for lon er tenors also&

,echni-ues of Syndication:
*est .ffort Syndicate: In this #ethod the lead #ana ers do not under+rite the loan but undertake to offer the
loan to the banks in the #arket on certain ter#s and conditions& This is akin to the #ethod kno+n as )4ell as and +hen can be sold*& If the #arket res%onse is %oor, s"ndication is called off bein unsuccessful&

/lu0 Syndicate: 6nder this t"%e, the lenders +illin to fund, for#s a 7lub8Grou% kno+n as 4"ndicate&
This techni0ue can be co#%ared +ith a %rivate %lace#ent& No lead #ana ers are a%%ointed under this techni0ue& The banks share the res%onsibilit" and the benefits 9inco#e: out of the s"ndication, ulti#atel" benefits the borro+er&

1ir2 /o22it2ent Syndicate: This is a co##on techni0ue of s"ndication +herein a lead #ana er is a%%ointed and
iven the #andate to source the fundin re0uire#ent of the borro+er& The lead #ana er undertakes or co##its to arran e the re0uisite funds on the a reed ter#s ; conditions to the borro+er irres%ective of the #arket res%onse& The lead #ana er co##its to even fund the %ortion of the loan for +hich no suitable lenders could be found& 5or instance, if the lead #ana er receives #arket res%onse to the tune of Rs& <=> crores a ainst the antici%ated Rs& ?>>> crores, the lead #ana er +ould take u% the balance %ortion or Rs& @=> crores on his account since he has co##itted to the borro+er& Lecture Notes Prof. Rahul Shah (M): - + ! "#"$ %&%#'

International Lending

Ste3s in4 Process of Syndication:

Ste3 !: (33oint2ent of Lead Manager: Other than the ter#s and conditions, the borro+er selects a lead #ana er de%endin
on their abilit" to %rovide satisfactor" advice on the structurin of the loan %acka e, e$%ertise of the banks in the s%ecific fields, brand i#a e and re%utation in the s"ndicated #arket& On selection of the lead #ana er, the borro+er issues the #andate to the lead #ana er& Thereafter, the lead #ana er scouts for interested lenders to fund the s"ndicated a#ount that is done throu h #arketin b" issue of %lace#ent8infor#ation #e#orandu#, holdin road sho+s, #edia %ublicit" etc& 'o+ever, the infor#ation #e#orandu# does not restrict the e$ercise of credit revie+ b" the lenders& The lead #ana er bears the res%onsibilit" for raisin the s"ndicate a#ount& The selection of the s"ndicated rou% of leaders is the %rivile e of the lead #ana er& The above #ini#izes the ti#e and effort in locatin the %ros%ective lenders as the lead #ana er has b" virtue of his %resence in the #arket for a lon ti#e and +ith his e$%ertise is able to shortlist8contact the %robable lenders& Nor#all" this %eriod ran es fro# ?= da"s to A> da"s&

Ste3 #: Pre Negotiation Stage: The borro+er decides u%on the size and currenc" of the loan he desires to borro+& 'e
%re%ares an infor#ation #e#orandu# containin infor#ation about the borro+er 9or anization, assets, financial state#ents etc&: the a#ount and #aturit" of the desired loan, intended use of the loan, surve" of the borro+er*s countr" and its econo#", closure date and so forth& In case the %ur%ose of the loan is for settin of a s%ecific %ro1ect in that case, the details of the %ro1ect viz& location, %rocure#ent of ra+ #aterials, cost of the %ro1ect, #eans of finance, %ro1ected %rofitabilit" etc are %rovided& The infor#ation #e#orandu# constitutes the basis of decision!#akin b" the banks and should be accurate and co#%rehensive as %ossible&

Ste3 ": In)itations: The borro+er then sends invitations to sub#it credit %ro%osals to various banks
acco#%anied b" the infor#ation #e#orandu#& 6suall", these are sent to banks +ith +hich the borro+er has had dealin s in the %ast or banks that have infor#all" e$%resses interest& This is done on a confidential basis& These invitations are for invitin bids fro# the banks for arran in the loan& These banks are ter#ed as Lead Arran ers 8 .ana ers&

Ste3 $: (cce3tance: On recei%t of bids and co#%arison of the sa#e, the borro+er decides the bank, +hich
see#s best to hi# in ter#s of the total cost of the %acka e, the other ter#s and Lecture Notes Prof. Rahul Shah (M): - + ! "#"$ %&%#'

International Lending conditions and the relationshi% factor& Once the bid is acce%ted, he +ill #andate the lead #ana er to arran e the loan&

Ste3 &: Loan Negotiating: The borro+er then constitutes a loan!ne otiatin

%anel consistin of its to% #ana e#ent officials, finance #ana ers, an o%eratin officer and a le al officer& The %anel ensures that the necessar" a%%rovals fro# the Board of Directors, Govern#ent authorities are in %lace&

Ste3 5: Syndicate 4 6iscussions: The re%lies fro# the banks +ould s%ell out the )business ter#s* under +hich the"
+ould be +illin to %rovide a loan or undertake to for# a s"ndicate to %rovide the loan& These ter#s +ould indicate the interest rate 9s%read over LIBOR in case of floatin rate loans:, #ana e#ent fees, co##it#ent fees, %artici%ation fees, #aturit", re%a"#ent schedule, race %eriod etc& It +ould also s%ecif" +hether the %ro%osal is on )Best Efforts* basis or )6nder+ritten* basis& In the latter case 96nder+ritten:, the bank co##its to %rovide the full a#ount +ith or +ithout the %artici%ation of other banks& The %ro%osal #a" also indicate +hether the banks +ould need third %art" uarantees, collateral or an" other for# of securit"& This is an i#%ortant as%ect and #a" subse0uentl" involve e$tensive ne otiations& The offer letter +ill also indicate the validit" of the offer&

Ste3 %: Mandate: After a scrutin" of all %ro%osals received, the borro+er a+ards a #andate to a bank or
rou% of banks to be the Lead #ana ers& The acce%tance of the %ro%osal i#%lies acce%tance of the business ter#s and other conditions of the offer& There is little sco%e for ne otiatin the business ter#s durin the for#al ne otiation %hase thou h so#e tradeoffs can be ne otiated 9lo+er s%read in e$chan e rate:&

Ste3 ': 1inalisation Phase: It follo+s ne$t, leadin to the Loan A ree#ent& The banks %resent the borro+er +ith
a draft a ree#ent at the start of the ne otiations and the ne otiations %roceed se0uentiall" throu h all the %rovisions& Once all the %artici%ants have been finalized, the lead #ana ers and the borro+er and +here re0uired, the uarantor finalise the loan a ree#ent& There is onl" a sin le docu#ent, +hich is e$ecuted b" the %artici%ant lenders&

Ste3 : 1ees and charges for Syndication: The interest rate on s"ndication is on floatin rate basis linked to LIBOR& Nor#all",
the s%read is loaded to the LIBOR and offered to the borro+er& In addition to the interest cost, the borro+er also incurs other costs viz&, front!end fees, u%front fees, co##it#ent char es, le al char es etc& Lecture Notes Prof. Rahul Shah (M): - + ! "#"$ %&%#'

International Lending

The u%front8front!end fees ran e fro# >&@=C to ?&>>C and are recovered on si nin
of the loan a ree#ent& 'o+ever, these char es are not fi$ed and are based u%on the ne otiation bet+een the lender and the lead #ana er&

,he Ma7or Pro)isions of the Loan (gree2ent:

9?: *usiness ,er2s: 4%ells out the financial obli ations of the borro+er to the lenders such as interest %a"#ents, co##it#ent and a enc" fees, re%a"#ent schedules, and interest!reset %eriod& 9@: 6eclaration of the *orro+er (Re3resentations and 8arranties): This contains re%resentation of facts %ertainin to the borro+er*s financial, le al and other relevant issues, co#%liance +ith all a%%licable overn#ental sti%ulation etc& 9,: Security: It defines the securit" for the loan co#%osin of the %ri#ar" and the collateral securit"& 9D: .)ents of 6efaults: This contains the circu#stances and +hich +ill be treated as events of default viz& suit a ainst the borro+er, default b" the borro+er in servicin the loan, cross default clause& 9=: 9urisdiction: This section tells the a%%licabilit" of the la+ 9+hich la+! India or 64A: and 1urisdiction&

Lecture Notes Prof. Rahul Shah (M): - + ! "#"$ %&%#'