Wednesday, March 24, 2010

Syndication Process


Syndication effectively begins with an issuer selecting a lead arranger for a particularloan. The selection of a lead lender is arranger for a particular loan. The selection of a lead lender is based on a number of factors, including the proposed terms and and conditions of the facility, the willingness of the lender to hold a designated amount of the loan after the syndication, the reputation and experience of the potential lead lender, and the ability of the lead lender to execute and support other types o capital markets products for the company. In the process of competing for a kets products for the company. In the process of comp-eting for a mandate, lending institutions evaluate the viability of taking
the borrower into the loan market and generally do this using their capital markets desks.
The capital markets process involves an assessment of a potential borrower’s financing requirements and credit quality to determine the optimal financing structure to meet the borrower’s objective.

Benefits of Syndicate Loans

Benefits of  Syndicate Loans:

In the primary market for syndicated loans, issuers and investors come together to price, structure, and invest in one of the oldest of financial instruments bank loans. The primary market for syndicated loans retains some unique attributes that are distinct from those of other debt markets. Some of those attributes are :

Flexible Structuring. Loans remain one of the most customized credit products in the capital markets, with highly negotiated packages of covenants and other structural elements. Arrangers compete by crediting unique structures, and investors are willing to accept these unique structures as long as that believes that the structures represent an acceptable risk. The primary market for loans accommodates this structural flexibility with highly negotiated term sheets and documentation.
Revolving Loans Unlike other fixed- income markets, like loan market remains heavily weighted toward revolving loans. Nearly every company has at least some account of unfunded revolving in its capital structure that allows it to mange the fluctuations in its cash levels caused by working capital and other needs. The need to accommodate requirements for revolving credit is a structural challenge that is unique for the loan market.
Floating rate/Callable Loans are generally floating rate instruments and as such do not have the interest rate and inflation risk inherent in fixed rate debt. In addition, because loans are priced on a floating rate basis, generally at a spread over the 30-90 days London InterBank Offer rate (LIBOR) Index, Loans do not have the same prepayment breakage costs as fixed rate debt, Where pricing is based on long term treasury rate indices. For this reason, loans are generally callable at par at any time. In recent years some loans have included call protection features where the loan is callable but a slight premium is payable during the first year or two. This s still very different from the bond market, where the debt has a generally has a lengthy non call period and pre payment penalties designed to discourage early termination.
Relationship Underpinnings Much of the loan market is still made up of relationship oriented banks making loans to their corporate clients and holding those loans on their balance sheets. Because corporate issuers expect their core relationship banks to provide and hold credit in order to be eligible to provide other products, banks are critical investors in the loan market. This is in contrast to other fixed income markets, where investment decisions are made purely on a risk/return basis, and issuers are not reliant on their investors for other financial services.
Private market Though there are an increasing number of institution investors participating in the loan market n a public basis, The loan market is still primarily a private market, and a majority of market participants prefer the greater amount of information afforded private investors in order to complete their credit analysis. For this reason, the primary loan market provides significantly more information then is typically available for public securities, including detailed historical analysis and projections. Private investors are not permitted to actively trade other securities of the issuer while they are in possession of the private offering material. In addition, the principal regulatory oversight comes from bank regulators such as the office of comptroller of the currency. There is no direct SEC regulation, as bank loans are not considered securities.