What You Need to Know About Loan Syndications

If you’re applying for corporate finance internships, or keen to work on Mergers & Acquisitions (M&A), you’ll need to know about syndicated loans. 

Loan syndication involves a group of lenders coming together to finance various portions of a single massive loan for a single borrower. Since the amount is huge, banks plan loans worth a billion or 10 billion dollars or even more, working with as many as 10-30 other banks to lend this amount to the corporation. It allows diversification of the risk instead of one bank bearing it alone. There’s usually one bank acting as the ‘lead’ on the syndicated loan that brings in other banks and organizes terms, covenants, etc. For example, BOFA brings in JPMorgan, Wells Fargo, and Credit Suisse for a $1 billion takeover, contributing $350 million while the other banks pool in the remaining $650 billion.

 

However, there’s another term called loan syndicate that’s different from syndicated loans. Loan syndicate means that besides performing the syndicated loan itself, we sell the loan in the secondary markets to other banks or other FIs. 

🤔You may wonder why banks want to sell the loan? 

Banks like BNP Paribas and Credit Agricole in Hong Kong may not have sufficient liquidity to finance corporate loans by themselves. They’d avoid giving loans worth $500 million or 1 billion that would sap their liquidity. So they sell the loan to HSBC or Bank of China. Since they won't be the direct lenders anymore, they don’t bear the risk, and charge HSBC or BOC an ‘arranging fee’. 

Also, banks charge a *spread/ split??* on the difference in the issuing. For instance, if a bank lends at an interest rate of 1.5%, when it sells the loan to another bank, the interest rate could be 1.6% thus earning 0.1% in between by charging a higher rate. 

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