What is a syndicated loan?
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A syndicated loan is a loan that is provided by not just one, but instead by a variety of lenders. In affect such a loan is one that is controlled by one or several investment or commercial banks. These are known as the loans arrangers.
Such a type of loan is the most sought after way for both UK and US corporations to loan from both banks and institutional financial capital providers.
The group of lenders in question will work together to provide a loan to a single borrower. This loan could be for a number of things including a business corporation, a business set-up or project or alternatively a government.
Typically a syndicate loan consists of one lead loaner, who is known as the arranger of the syndicate loan. This particular lender often puts in a bigger sum than the other lenders or otherwise performs the loan arrangements. These could be duties such as releasing the cash flows and administrative roles.
Loans can come in the shape of fixed amounts, a credit line or otherwise in the form of a combination of the two.
Interest rates also differ and can be fixed for the entirety of the loan or are based on a floating rate on a benchmark rate.
The main function of a syndicated loan is to spread the risk of a borrower nonappearance across a gathering of lenders. Another reason the loan is divided across a large party is because it is often much larger than your everyday average loan.
Because the loan is much larger than a bank loan, the risk of one sole lender not paying out could in fact cause the lender devastation.
Syndicated loans often work on a ‘best efforts’ basis; this in fact means that if the desired number of investors can’t be sourced then the lender will go with a lower loan than originally desired.
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