The 3 Types of Syndicated Loans

Syndicated loans are debts issued by a consortium of lenders to a sole borrower. The amount of one syndicated loan is so big such that one lender cannot fund or take on the debt alone. Corporations are usually the borrowers for this type of loan. They use the funds to help them bankroll takeovers, acquisitions or expansion projects. Also, sovereign countries may apply for syndicated debts to fund infrastructure projects or bridge gaps in their national budgets.

The lenders are usually composed of big banks, but financial institutions like mutual funds and insurance companies also participate in this type of lending. There will be a lead lender or arranger for each consortium. Apart from funding a substantial portion of the loan, the lead agent will also be responsible for facilitating the loan and allocating cash flows to the other members of the consortium. Here are the main types of syndicated loans:

1. Underwritten Deal

The underwritten deal is one of the most widely available types of syndicated loans in Europe. Under this arrangement, the lead agent or underwriter guarantees and syndicates the entire loan. If the loan has not been fully subscribed, the lead agent can opt to absorb the undersubscribed portion. Then, if market conditions are bullish, the same lead agent can sell to other investors the undersubscribed part of the loan that it has absorbed. However, if markets are bearish, the lead arranger may be forced to sell any undersubscribed portion at a discount or simply consider the whole thing as a loss.

There are several reasons why a bank may decide to become the underwriter. First, this type of loan can make a financial institution look more competitive. Next, a syndicated debt could mean huge profits for the bank because the risks involved in this type of loan can translate to higher service fees. Lastly, underwritten deals now have floating interest rates, thus the risks are no longer as high as debts with fixed rates.

2. Club Deal

This type of syndication usually entails a smaller amount, typically between $25 and $150 million. The main feature that makes this type of syndicated loan unique is the fact that the lead agent and other members of a club deal consortium all share equal, or nearly equal, parts of the fees earned from the loan facility.

3. Best-Efforts Syndication Deal

Of all the types of syndicated loans, the best-efforts syndication is the most commonly used in the United States. Under this arrangement, the lead agent does not commit or guarantee the entire amount of the loan.  Any undersubscribed portion of the loan will be filled up by taking advantage of the changes in market conditions. However, if the loan continues to be undersubscribed, the borrower may be forced to accept a lower loan amount or the loan agreement is canceled entirely.

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