Syndicate finance is one in which contract two or more bank ( the syndicate lenders) contract with a borrower to provide the loan on common terms and conditions governed by a common documents or set of documents.
What is syndicate Finance:
As per Investopedia, “A syndicated loan, also known as a syndicated bank facility, is financing offered by a group of lenders referred to as a syndicate-who work together to provide funds for a single borrower. The borrower can be a corporation, a large project, or a sovereign government. The loan can involve a fixed amount of fund, a credit line, or a combination of the two.”
Why syndicate finance?
Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class.
Syndicating the loan allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base.
Banks also set prudential loan limit internally to restrict loan exposure on a single customer.
Banks are restricted to take funded exposure on a single borrower up to 15% of their capital and non-funded exposure up to 35% of their capital depending on the amount of funded exposure i.e. total funded and non-funded exposure would be maximum 35%.
Bangladesh Bank further limits percentage of total credit portfolio that can be in the form of large loan (i.e. loan size exceeding 10% of banks capital) based of percentage of classified loan.
Parties related to Syndication:
Participating Banks /Financial Institutions
Other participants Bank
Participants such as Security Trustee, Book runner, Model bank
In Syndication financing, banks also enter into an agreement that of the lenders may act as Lead Bank. In such case, lead bank has to co-ordinate the activities at various stages of handling the proposal i.e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery, distribution of installments/in etc. Lead Bank’s status on security/collateral arrangement should be properly detailed in the proposal.
Required Documents for Syndicate Finance:
Escrow Account Agreement.
Deed of floating charge on the balance for the Escrow Account
Agreement for Assignment (Insurance)
Projects fund and Share Retention Agreement.
Equity support and share retention agreement.
Letter of Consent of the 1st Mortgage Bank in case of 2nd charge/mortgage & also PARI-PASSU security sharing agreement between 1st Mortgage Bank and the Mortgagee, if applicable subject to consent of 1st Mortgage Bank.
PARI-PASSU Security Sharing Agreement duly signed by all lenders.
Creation of Pari-Passu Sharing charge with RJSC & F.
NOC from existing lenders if the property/assets are already under Pari-Pasu sharing.
Certificate of RJSC &F on creation of charge on Fixed floating assets of the company
Accepted Mandate Letter.
Participant’s Commitment Letter.