Loan syndication

M.D.COLLEGE TYFM LOAN SYNDICATION

B.COOM (FINANCIAL MARKETS ) 1 | P a g e

CHAPTER - 1

INTRODUCTION

LOAN MARKET IN U.S.A.

In the U.S., market flex language drives initial pricing levels. Before

formally launching a loan to these retail accounts, arrangers will often get a

market read by informally polling select investors to gauge their appetite for

the credit. After this market read, the arrangers will launch the deal at a

spread and fee that it thinks will clear the market. Until 1998, this would

have been it. Once the pricing, or the initial spread over a base rate which is

usually LIBOR, was set, it was set, except in the most extreme cases. If the

loans were undersubscribed, the arrangers could very well be left above their

desired hold level. Since the 1998 Russian financial crisis roiled the market,

however, arrangers have adopted market-flex language, which allows them

to change the pricing of the loan based on investor demand—in some cases

within a predetermined range—and to shift amounts between various

tranches of a loan, as a standard feature of loan commitment letters.

As a result of market flex, loan syndication functions as a book-building

exercise, in bond-market parlance. A loan is originally launched to market at

a target spread or, as was increasingly common by 2008 with a range of

spreads referred to as price talk (i.e., a target spread of, say, LIBOR+250 to

LIBOR+275). Investors then will make commitments that in many cases are

tiered by the spread. For example, an account may put in for $25 million at

LIBOR+275 or $15 million at LIBOR+250. At the end of the process, the

arranger will total up the commitments and then make a call on where to



price the paper. Following the example above, if the paper is vastly

oversubscribed at LIBOR+250, the arranger may slice the spread further.

Conversely, if it is undersubscribed even at LIBOR+275, then the arranger

will be forced to raise the spread to bring more money to the table.



LOAN MARKET IN EUROPE

In Europe, banks have historically dominated the debt markets because of

the intrinsically regional nature of the arena. Regional banks have

traditionally funded local and regional enterprises because they are familiar

with regional issuers and can fund the local currency. Since the Euro zone

was formed in 1998, the growth of the European leveraged loan market has

been fuelled by the efficiency provided by this single currency as well as an

overall growth in merger & acquisition (M&A) activity, particularly

leveraged buyouts due to private equity activity. Regional barriers (and

sensitivities toward consolidation across borders) have fallen, economies

have grown and the euro has helped to bridge currency gaps.

As a result, in Europe, more and more leveraged buyouts have occurred over

the past decade and, more significantly, they have grown in size as arrangers

have been able to raise bigger pools of capital to support larger, multi-

national transactions. To fuel this growing market, a broader array of banks

from multiple regions now fund these deals, along with European

institutional investors and U.S. institutional investors, resulting in the

creation of a loan market that crosses the Atlantic.



CHAPTER - 2

LOAN SYNDICATION

The size of loan is large, individual banks cannot or will not be able to

finance. They would prefer to spread risk among a number of banks or a

group of banks is called as “Syndication of loans”. These days there are

large group of banks that form syndicates to arrange huge amount of loans

for corporate borrowers the corporate that would want a loan but not be

aware of those banks willing to lend. Hence, syndication pays a vital role

here. Once the borrowers has decided upon the size of the loan, he prepares

an information memorandum containing information like the amount he

requires, the purpose, business details of his country and its economy. Then

he receives bids (after this the borrower and the lender sit across the table to

discuss about the terms and conditions of lending this process of

negotiations is called ‘syndication’.) The process of syndication starts with

an invitation for bids from the borrower. The mandate is given to a particular

bank or institution that will take the responsibility of syndicating the loan

while arranging the financing banks.

Syndication is done on a best effort basis or an underwriting basis. It is

usually the lead manager who acts as the syndicator of loans, the lead

manager has dual tasks that is, formation of syndicate documentation and

loan agreement. Common documentation is signed by the participation

banks or common terms and conditions. Thus, the advantages of the

syndicated loans are the size of the loan, speed and certainty of funds,

maturity profile of the loan, flexibility in repayment, lower cost of fund,



diversity of currency, simpler banking relationship and possibility of

renegotiation.

"Syndication is an arrangement where a group of banks, which may not have

any other business relationship with the borrower, participate for a single

loan."

Typically, syndicated loans are structured as term loans or operating

revolvers. However, they may also include tranche or segmented structures,

letters of credit, acquisition facilities, construction financing, asset-based

structures, project financing and trade finance. The standard theory for why

banks join forces in a syndicate is risk diversification.

FOR EXAMPLE: If a company wants a huge amount as a loan for

expansion or any other purpose, say when Reliance or ITC wants money,

loans are got from the banks. But generally, it got from a single bank and

that single bank alone shares the risk. Take the case of funding a rocket

launch - if the launch is a failure, then the bank which funds for it may

become bankrupt. But in syndication, many banks come together and fund a

single project.

Loan syndication is basically done to share the total loss or liability.



CHAPTER - 3

TYPES OF LOANS SYNDICATION

Globally, there are three types of underwriting for syndications: an

underwritten deal, best-efforts syndication, and a club deal. The European

leveraged syndicated loan market almost exclusively consists of

underwritten deals, whereas the U.S. market contains mostly best-efforts.



• UNDERWRITTEN DEAL

• An underwritten deal is one for which the arrangers guarantee the entire

commitment, and then syndicate the loan.

• If the arrangers cannot fully subscribe the loan, they are forced to absorb

the difference, which they may later try to sell to investors.

• If it is not get sold than the arranger may be forced to sell at a discount

and, potentially, even take a loss on the paper.

• Arrangers underwrite loans for several reasons. First, offering an

underwritten loan can be a competitive tool to win mandates.

• Second, underwritten loans usually require more lucrative fees because

the agent is on the hook if potential lenders balk.

• BEST-EFFORTS SYNDICATION

• A best-efforts syndication is one for which the arranger group commits to

underwrite less than the entire amount of the loan, leaving the credit to

the vicissitudes of the market.

• Traditionally, best-efforts syndications were used for risky borrowers or

for complex transactions.

• Since the late 1990s, however, the rapid acceptance of market-flex

language has made best-efforts loans the rule even for investment-grade

transactions.



• CLUB DEAL

A club deal is a smaller loan usually $25–100 million, but as high as $150

million—that is pre marketed to a group of relationship lenders. The

arranger is generally a first among equals, and each lender gets a full cut, or

nearly a full cut, of the fees.



CHAPTER - 4

CREDIT INSTRUMENTS OF LOANS

SYNDICATION

Syndicated loan agreements may contain only a term or revolving facility or

they can contain a combination of both or several of each type (for example,

multiple term loans in different currencies and with different maturity

profiles are not uncommon). There can be one borrower or a group of

borrowers with provision allowing for the accession of new borrowers under

certain circumstances from time to time. The facility may include a

guarantor or guarantors and again provisions may be incorporated allowing

for additional guarantors to accede to the agreement.

Two types of loan facility are commonly syndicated: term loan facilities and

revolving loan facilities:

• TERM LOAN FACILITY

• Under a term loan facility the lenders provide a specified capital sum

over a set period of time, known as the "term".

• The borrower is allowed a short period after executing the loan (the

"availability" or "commitment" period), during which time it can draw

loans up to a specified maximum facility limit.

• Repayment may be in installments or there may be one payment at the

end of the facility.

• Once a term loan has been repaid by the borrower, it cannot be re-drawn.



• REVOLVING LOAN FACILITY

• A revolving loan facility provides a borrower with a maximum aggregate

amount of capital, available over a specified period of time.

• Unlike a term loan, the revolving loan facility allows the borrower to

draw down, repay and re-draw loans advanced to it of the available

capital during the term of the facility.

• Each loan is borrowed for a set period of time, usually one, three or six

months.

• Repayment of a revolving loan is made either by regular reductions in the

total amount of the facility over time, or by all outstanding loans being

repaid on the date of termination.

• If another revolving loan is made to refinance another revolving loan

which has a maturity on the same date it is called as "rollover loan".

• A revolving loan facility is a particularly flexible financing tool as it may

be drawn by a borrower by way of simple loans, but it is also possible to

incorporate different types of financial accommodation within it.



CHAPTER - 5

NEED FOR LOAN SYNDICATION

CORPORATES OPTION FOR SYNDICATION WHEN

1. The borrower wants to raise large amount of money quickly and

conveniently.

2. The amount exceeds the exposure limits or appetite of any one lender.

3. The borrower does not want to deal with a large number of lenders.

Traditionally, loan syndication was practiced in Europe. Euro syndicated

loan is usually a floating rate loan with fixed maturity, a fixed draw down

period and a specified repayment schedule. One, two or even three banks

may act as lead managers and distribute the loan among themselves and

other participating banks. One of the lead banks acts as the agent bank and

administers the loan after execution, disbursing funds to the borrower,

collecting and distributing interest payments and principal repayments

among lead banks, etc. A typical Euro credit would have maturity between 5

to 10 years, amortization in semi-annual installments, and interest rate reset

every three or six months with reference to LIBOR.

Syndicated loans can be structured to incorporate various options, e.g., a

drop lock feature converts the floating rate loan into a fixed rate loan if the

benchmark index hits a specified floor. A multi-currency option allows the

borrower to switch the currency of denomination on a roll-over date.

Security in the form of government guarantee or mortgage on assets is

required for borrowers in developing countries like India.



SYNDICATED LOAN MARKETS

Syndicated loans are international in their understanding, although certain

geographical regions, maintain unique attributes. The broad international

markets are North America, EMEA and Asia. Within Asia, based upon size

and volume of loans, Japan is often singled out as a significant market.

The syndicated loan market could be roughly divided into two “classes” of

syndicated loans. The first, designed for smaller companies (loan sizes

approximately between 20 to 250 Million), feature funds usually lent by a

fixed group of banks for a fixed amount. In North America and Europe,

larger loans than this are often open to be traded, so that they almost become

more like a regular bond. Purchasers of these loans include hedge funds,

pension funds, banks, and other investment vehicles. Asian markets have

limited number of loans that are freely traded this way.

The second, until the subprime lending crisis, larger syndicated loans,

although “agented” by one bank, were often sold to the international capital

markets after repacking into trusts and being sold as collateralized loan

obligations. For larger loans, there was some evidence that the agent banks

would often underwrite portions of these loans specifically for on selling as

collateralized loan obligations. This underwriting may have been in excess

of the broader expected appetite of traditional lenders. With the collapse of

many aspects of the international fixed income (lending) capital markets due

to the subprime crisis, many banks were stuck with underwritten positions,

potentially on trems they would not have lent on for the entire stated period

of the business loan. These are known as “hung” or “stuck” underwriters or



loans and have been responsible for a portion of the recent losses of financial

institutions.



CHAPTER - 6

STAGES AND PROCESS OF LOAN SYNDICATION

STAGES INVOLVED IN LOANS SYNDICATION

• PRE - MANDATE PHASE

The prospective borrower may liaise with a single bank or it may invite

competitive bids from a number of banks. The lead bank identifies the needs

of the borrower, designs an appropriate loan structure, develops a persuasive

credit proposal, and obtains internal approval. The mandate is created. The

documentation is created with the help of specialist lawyers.



• PLACING THE LOAN

The lead bank can start to sell the loan in the market place. The lead bank

needs to prepare an information memorandum, term sheet, and legal

documentation and approach selected banks and invite participation. The

lead manager carries out the negotiations and controversies are ironed out.

The syndication deal is closed, including signing of the mandate.

• POST - CLOSURE PHASE

The agent now handles the day-to-day running of the loan facility.



PROCESS INVOLVED IN LOAN SYNDICATION

• The borrower decides about the size and currency of the loan he desires

to borrowers and approaches the banks for arranging the financing on the

basis of business, purpose of the loan, etc.

• For a name acceptable in the market, in general several banks or group of

banks will come forward with offers indicating broad terms on which

they are willing to arrange the loan. The bank offers to be Lead Manager.

In their offers, the lead manager would indicate the loan and its

commitment and other charges and spreads over LIBOR on which they

are willing to arrange the loan.

• The borrower chooses the bid which appears to be the best to him in

terms of the package, other terms and conditions and the relationship

factor, etc., on receiving the bid from various banks or groups of banks.

• The loan gets finalized by both the borrowers and the lenders on and the

lenders on an information memorandum giving financial details and other

details of the borrower. The lead manager would participate in the loan

from lenders based on the information memorandum.

• The entire fees would be showed by the participating bank (based on

their participation) and lead manager.

• The Lead Manager are liable to finance the balance amount.

• The next step in finalization of the loan agreement by borrowers and

lender is done after the participants are known and the loan is published

through a financial press.



CHAPTER - 7

PARTICIPANTS OF LOAN SYNDICATION

• ARRANGER / LEAD MANAGER

The lead manager is a bank that is awarded the mandate by the prospective

borrower and is responsible for placing the syndicated loan with the other

banks and ensures that the syndication is fully subscribed. They are entitled

to the arrangement fee and undergo a reputation risk during this process.

• UNDERWRITING BANK

It is the bank that commits to supplying the funds to the borrower - if

necessary from its own resources if the loan is not fully subscribed. The lead

manager or another bank may play this role. Not all syndications are

underwritten. The risk is that the loan may not be fully subscribed.

“Syndication is an arrangement where a group of banks, which may not have

any other business relationship with the borrower, participate for a single

loan.”



• PARTICIPATING BANK

This bank participates in the syndication by lending a portion of the total

amount required. It is entitled to receive the interest and the participation

fee. But it, however, faces risks such as:

1. Borrower credit risk.

2. Passive approval and complacency

• FACILITY MANAGER / AGENT

This bank takes care of all the administrative arrangements over the term of

loan, e.g., disbursements, repayments, compliance. This bank acts on behalf

of all the banks participating. This may be either the lead manger or the

underwriting bank.

FUNCTIONS OF AGENT

• POINT OF CONTACT

Maintaining contact with the borrower and representing the views of the

syndicate.

• MONITOR

Monitoring the compliance of the borrower with certain terms of the

facility.



• RECORD-KEEPER

It is the agent to whom the borrower is usually required to give notice.

• PAYING AGENT

The borrower makes all payments of interest and repayments of principal

and any other payments required under the Loan Agreement to the Agent.

The Agent passes these monies back to the banks to which they are due.

Similarly the banks advance funds to the borrower through the Agent).



CHAPTER - 8

SIGNIFICANCE OF LOAN SYNDICATION

• ADVANTAGES

• Syndicated loan facilities can increase competition for your business,

prompting other banks to increase their efforts to put market information

in front of you in the hopes of being recognized.

• Flexibility in structure and pricing. Borrowers have a variety of options

in shaping their syndicated loan, multicurrency options, risk management

techniques, and prepayment rights without penalty.

• Syndicated facilities bring businesses the best prices in aggregate and

spare companies the time and effort of negotiating individually with each

bank.

• Loans terms can be abbreviated.

• Increased feedback. Syndicated banks sometimes willing to share

perspectives on business issues with the agent that they would be

reluctant to share with the borrowing business.



• Syndicated loans brings the borrower greater visibility in the open

market. Bunn noted that “for commercial papers issuers, rating agencies

view a multi – year syndicated facility as stronger support than several

bilateral one – year lines of credit.”

• Working capital credit (refinancing of small lines of credit, etc.).

• Export finance (including ECAs).

• Capital goods financing (machinery, etc.).

• Mergers & Acquisitions.

• Project finance (SPVs, structured according to cash flow).

• Stand-by facilities Guarantees (supply, service, etc.).

• Trade finance (Letters of credit, promissory notes, forfeiting).

• Allows the borrower to access from diverse group of financial

institutions.

• Borrowers can raise funds more cheaply in the syndicated loan market

than by borrowing the same amount of money through a series of

bilateral loans.

• This cost saving increases as the amount required rises.



• DISADVANTAGES

• Each bank needs to come to an understanding of the business and how

its financial activities are conducted.

• A comfort level must be established on both sides of the transaction,

which requires time and effort.

• Negotiating a document with one bank can take days. To negotiate

documents with four to five banks separately is a time-consuming,

inefficient task.

• Staggered maturities must be monitored and orchestrated.

• Multiple lines require an inter-creditor agreement among the banks,

which takes additional time to negotiate.



CHAPTER - 9

DOCUMENTATION

IMPORTANT PROVISION OF LOAN SYNDICATION

AGREEMENT

1. The loan agreement specifies the interest, commitment fees and the

management fees that the borrower should pay to the lender.

2. Document pertaining to borrower’s financial position, over run finance

agreement, got approvals received (for example: relating to tax, reduction

at sources) trying up of other financial requirements (if required),

certificates from lawyers, and other internal and external approval that

would be required.

3. The primary or the secondary security against which the loan is taken

will have to be decided.

4. The circumstances that are to be treated as default and suit against the

borrower is not servicing the loan, cross default clauses (aimed at giving

the lenders the right to accelerate repayment of the loan in the event of

the borrower or guarantor is in default under any loan agreement), etc.

are decided.

5. Jurisdiction is an important element of any international loan agreement

and it tells which country’s law is applicable.



DOCUMENTATION FOR A SYNDICATED LOAN

• MANDATE LETTER

The borrower appoints the Arranger via a Mandate Letter (sometimes also

called a Commitment Letter). The content of the Mandate Letter varies

according to whether the Arranger is mandated to use its "best efforts" to

arrange the required facility or if the Arranger is agreeing to "underwrite"

the required facility. The provisions commonly covered in a Mandate Letter

include:

1. An agreement to "underwrite" or use "best efforts to arrange";

2. Titles of the arrangers, commitment amounts, exclusivity provisions;

3. Conditions to lenders' obligations;

4. Syndication issues (including preparation of an information

memorandum, presentations to potential lenders, clear market provisions,

market flex provisions and syndication strategy);

5. Costs cover and indemnity clauses.

• TERM SHEET

The Mandate Letter will usually be signed with a Term Sheet attached to it.

The Term Sheet is used to set out the terms of the proposed financing prior

to full documentation. It sets out the parties involved, their expected roles

and many key commercial terms (for example, the type of facilities, the

facility amounts, the pricing, the term of the loan and the covenant package

that will be put in place).



• INFORMATION MEMORANDUM

Typically prepared by both the Arranger and the borrower and sent out by

the Arranger to potential syndicate members. The Arranger assists the

borrower in writing the information memorandum on the basis of

information provided by the borrower during the due diligence process. It

contains a commercial description of the borrower's business, management

and accounts, as well as the details of the proposed loan facilities being

given.

It is not a public document and all potential lenders that wish to see it

usually sign a confidentiality undertaking.

• SYNDICATED LOAN AGREEMENT

The Loan Agreement sets out the detailed terms and conditions on which the

Facility is made available to the borrower.

• FEE LETTERS

In addition to paying interest on the Loan and any related bank expenses, the

borrower must pay fees to those banks in the syndicate who have performed

additional work or taken on greater responsibility in the loan process,

primarily the Arranger, the Agent and the Security Trustee. Details of these

fees are usually put in separate side letters to ensure confidentiality. The

Loan Agreement should refer to the Fee Letters and when such fees are

payable to ensure that any non-payment by the borrower carries the remedies

of default set out in the Loan Agreement.



CHAPTER - 10

SYNDICATION LOAN TRANSFER

REASONS TO SELL A PARTICIPATION IN LOAN

SYNDICATION

A lender under a syndicated loan may decide to sell its commitment in a

facility for one or more of the following reasons:

• REALIZING CAPITAL

If the loan is a long-term facility, a lender may need to sell its share of the

commitment to realize capital or take advantage of new lending

opportunities.

• RISK/PORTFOLIO MANAGEMENT

A lender may consider that its loan portfolio is weighted with too much

emphasis on a particular type of borrower or Loan or may wish to alter the

yield dynamics of its loan portfolio. By selling its commitment in this loan,

it may lend elsewhere, thus diversifying its portfolio.

• REGULATORY CAPITAL REQUIREMENTS

A bank's ability to lend is subject to both internal and external requirements

to retain a certain percentage of its capital as cover for its existing loan

obligations. These are known as "Regulatory Capital Requirements".



• CRYSTALLIZE A LOSS

The lender might decide to sell its commitment if the borrower runs into

difficulties - specialists dealing in distressed debts provide a market for such

loans.

However, before the lender can go ahead and transfer its participation in a

syndicated loan, it must consider the implications of the methods of transfer

available to it under the Syndicated Loan Agreement.



FORMS OF TRANSFER

The most common forms of transfer to enable a lender to sell its loan

commitment are:

• Novation. (the most common legal mechanic used in transfer

certificates scheduled to loan agreements)

• Legal assignment.

• Equitable assignment.

• Funded participation.

• Risk participation.

Methods (i) and (ii) result in the lender disposing of its loan commitment

with the new lender assuming a direct contractual relationship with the

borrower, whilst methods (iii) to (v) result in the lender retaining a

contractual relationship with the borrower.

Each of these methods is now explained in more detail:

1) NOVATION

• Novation is the only way in which a lender can effectively 'transfer' all its

rights and obligations under the Loan Agreement.

• The process of transfer effectively cancels the existing lender's

obligations and rights under the loan, while the new lender assumes

identical new rights and obligations in their place.



• Therefore the contractual relationship between the transferring lender and

the parties to the loan agreement cease.

• The new lender enters into a direct relationship with the borrower, the

agent and the other lenders.

• The borrower has to be a party to the novation process.

• The documentation required to affect a novation of a participation in a

syndicated loan depends on the provisions in the Loan Agreement.

• However most Loan Agreements (including the LMA recommended

form) have a transfer certificate attached as a schedule that operates by

way of novation.

• The Agent, the new lender and the existing lender are the only parties

usually required to execute the transfer certificate.

2) LEGAL ASSIGNMENT

• Assignment involves the transfer of rights, but not obligations.

• For a legal assignment, Section.136 of the Law of Property Act 1925

provides that the assignment must be:

� Absolute (i.e. the whole of the debt outstanding to the existing lender).

� In writing and signed by the existing lender.

� Notified in writing to the borrower.



• In the context of the syndicated loan, a legal assignment will transfer all

of the existing lender's rights under the Loan Agreement (including the

right to sue the borrower and the right to discharge the assigned debt) to

the new lender.

• The obligation of the existing lender to provide funds to the borrower

cannot be transferred by legal assignment and thus remains with the

existing lender.

• The new lender pays the existing lender any funds due under the loan and

the existing lender sends those funds on to the Agent, who then passes

such funds on to the borrower.

3) EQUITABLE ASSIGNMENT

• As mentioned above, an equitable assignment is created when one or

more of the provisions of section 136 of the Law of Property Act 1925 is

not met.

• In contrast to a legal assignment, the new lender, as the equitable

assignee, must join the existing lender, as assignor.



• The most significant difference between a legal and equitable assignment

arises if the borrower is not notified of the assignment.

• If the borrower is not notified of the assignment, the new lender will be

subject to all equities which arise between the existing lender and the

borrower.

4) FUNDED PARTICIPATION

• Under a funded participation the existing lender and the participant enter

into a contract providing that the participant while repaying the principle

amount of the loan and the interest will provide the existing lender with

the same amount of shares in the share capital of the company.

• A funded participation agreement is made between the existing lender

and the participant.

• This creates new contractual rights between the existing lender and the

participant.

• However this is not an assignment of those existing rights and the

existing lender remains in a direct contractual relationship with the

borrower.

• The existing lnder remains liable under the Syndicated Loan Agreement.



5) RISK PARTICIPATION

• Risk participation is a form of participation which acts like a guarantee.

• The risk participant will not immediately place any money with the

existing lender, but will agree, for a fee, to put the existing lender in

funds in certain circumstances (typically on any payment default by the

borrower).

• Risk participation may be provided by a new lender as an interim

measure before it takes full transfer of a loan.

• No borrower consent is required for either a Funded Participation or a

Risk Participation, so this process can be confidential.

• There is no direct contract between the new lender and the borrower but

the participant usually obtains rights of subrogation because in case of

default by the borrower at the time of indemnifying the participant the

risk participant can gains the right to step into the existing lender's shoes.



CHAPTER - 11

TOP 20 BANKS PARTICIPATING IN LOAN SYNDICATION

RANK

PARTICIPATING BANK

COUNTRY

1

RAIFFEISEN ZENTRALBANK

ÖSTERREICH AG

AUSTRIA

2

UNICREDIT HVB GROUP BANK

AUSTRIA CREDITANSTALT

BAYERISCHE HYPO-UND

VEREINSBANK AG

UNICREDITO ITALIANO SPA

ITALY

AUSTRIA

GERMANY

3 ING GROEP NV NETHERLANDS

4

ERSTE BANK DER

OESTERREICHISCHEN

SPARKASSEN AG

FRANCE

5

ERSTE BANK DER

OESTERREICHISCHEN

SPARKASSEN AG

AUSTRIA

6 BNP PARIBAS SA FRANCE

7 STANDARD BANK LONDON LTD UNITED

KINGDOM

8 COMMERZ BANK AG GERMANY



9 BAYERISCHE LANDERS BANK GERMANY

10 DEXIA SA BELGIUM

11 NORDEA BANK SWEDEN AB(PUBL) SWEDEN

12 ABN AMRO BANK NB NETHERLANDS

13 FORTIS GROUP BELGIUM

14

FMO (THE NETHERLANDS

DEVELOPMENT FINANCE

COMPANY)

NETHERLANDS

15 CORDIANT CAPITAL INC CANADA

16 SUMITOMO MITSUI BANKING

CORPORATION JAPAN

17 SKANDINAVISKA ENSKILDA

BANKEN AB SWEDEN

18 STATE BANK OF INDIA INDIA

19 INTESA SANPAOLO SPA ITALY

20 SOCIETE GENERALE FRANCE



CHAPTER - 12

ROLE OF CREDIT RATING AGENCIES IN LOAN

SYNDICATION

A credit rating agency is an independent body which gives its opinion on the

future ability, legal obligation and moral commitment of an entity to meet its

financial obligation in a timely manner. Globally, credit ratings are pre-

requisite for raising finance and is used to assist potential investors in

decision making. Credit rating agencies specialize in analyzing and

evaluating the credit worthiness of the corporate and sovereign issuers.

Credit rating agencies bridge the gap of information between lenders and

borrowers regarding the credit worthiness of the borrower.

Issuers with lower credit rating always pay higher interest rate involving

larger risk premium then the higher rated issued. Rating determines the

eligibility of borrower to borrow and timely repayment of the loan.

The rating fall into two categories:

1) Recognized

2) Non – Recognized



In U. S. A. only 5 rating agencies are recognized by the Security exchange

Commission (SEC). Moody’s and Standards and Poors are the most popular

and recognized credit rating agencies all over the world. The majority of

credit rating agencies like Economic Intelligence Unit (EIU), Institutional

Investors (IT) and Euromoney are Non – Recognized.

Credit rating agencies differ in their methodologies, default risk and

perception.

Most of the international loans are unsecured in nature and are subject to

country risk and sovereign risk. A credit rating provides a larger variety of

information that needs to be known by the issuer of the bonds in a symbolic

format.

“Credit rating is nothing but an opinion and is not recommendation to buy,

to sell, or to hold a security”.

Following are the renowned credit rating agencies operating in International

Markets:

• Augusto and Company.

• Standards and Poors.

• Global Credit Rating (GCR).

• Moody’s.

• Flitch Ratings.



SIGNIFICANCE OF CREDIT RATING AGENCIES:

• Level of credit rating is indirectly proportionate to borrowing cost.

Higher the credit rating lower the borrowing cost and vice – versa.

• Rating provides information to the investment community and facilitates

access to debt market to borrower.

• Rating agencies provides free publicity about the financial performance

and make it easy to institute financial management technique which will

improve future ratings.

• Credit rating affects both sides of the balance sheet. (Borrowing and

investment)

• Opinion of credit rating agencies affect policies of the government and

corporate directly because government as well as corporate may avoid

certain decisions which may downgrade their future.

• Credit rating benefits both the parties. (Investor and borrower)



CREDIT RATING AGENCIES PROCESS:

Credit rating agencies normally use quantitative and qualitative methods for

rating. A sovereign rating involves “measuring a risk that the government

may default on its own obligation either in local currency or foreign

currency.” Rating agencies take into account both, ability as well as

willingness a government to repay its debt in a timely manner. In accessing

sovereign rick credit rating agencies highlight several parameters like:

• ECONOMIC PARAMETERS.

• POLITICAL PARAMETERS.

• FISCAL AND MONETARY FLEXIBILITY.

• DEBT BURDEN OF THE COUNTRY.



NAME OF

THE COMPANY

LOAN

RATING

MOODY'S /S&P

COUPON

MATURITY

BOSQUE POWER CO. WR/NR L+525 12/22/2014

CELANESE US HOLDINGS

LLC

N.R.*/N.R.* N.R.*/N.

R.*

10/1/2016

CHARTER

COMMUNICATIONS

WR/BB+ L+262.5 3/6/2014

CLAIRE'S STORES CAA2/B- L+275 5/29/2014

CLEAR CHANNEL

COMMUNICATIONS

CAA1/CCC L+365 1/30/2016

COLETO CREEK

B1/B+

L+275

6/28/2013

CONSTELLATION

BRANDS INC

BA3/BB

L+150

5/11/2013

DEX MEDIA WEST LLC

N.R.*/N.R.*

L+450

10/24/2014

FORD MOTOR

BA3/BB

L+300

12/15/2013



LAST MONTH‘S LOANS SYNDICATION TRACK

RECORD

GATEHOUSE MEDIA

CA/CCC-

L+200

2/27/2014

HERBST GAMING

WR/NR

L+187.5

12/8/2013

HERCULES OFFSHORE

B2/B-

L+650

7/11/2013

ISLE OF CAPRI CASINOS

B1/B+

L+175

12/19/2013

JOHN MANEELY CO

B3/B

L+325

12/9/2013

LEVEL 3

COMMUNICATIONS

B1/B+

L+225

3/1/2014

METRO-GOLDWYN-

MAYER INC

N.R.*/N.R.*

L+275

4/8/2012

NEIMAN MARCUS GROUP

INC

B2/BB-

L+200

4/6/2013



CHAPTER - 13 CONCLUSION

Over the past ten years, commercial lending has been transformed from a

one-off, bilateral “market” in which issuers maintained one or more separate

banking relationships into a capital market in which one or more

underwriter’s structure and price loans for syndication to groups of

investors. This market-driven evolution has been most dramatic in the

leveraged lending segment (defined as loans priced at LIBOR plus 150 basis

points or more), where wide margins have attracted a large and growing

field of underwriters, intermediaries, and investors.

Liquidity is the overriding theme in today's syndicated loan market, making

the market a more user-friendly one for corporate borrowers and deal

sponsors. As a result, a record number of corporate issuers are taking

advantage of the syndicated loan market to finance strategic transactions or

simply to reduce their borrowing costs.

For banks and other investors, reduced loan pricing and more flexible credit

structures have been balanced by much greater access to a large volume of

diversified assets, as well as the ability to manage asset-specific and

portfolio risk more effectively. As a result lenders today are less vulnerable

to credit problems with individual issuers or a given industry segment, and

the bank market as a whole should be much less subject to disruption than it

proved to be in the early 1990s.



For Infrastructure development; Due to tremendous growth in infrastructure

sector, loans syndication have become a most sought credit instruments in

the most emerging markets. So far infrastructure development was the

domain of government. But due financial constraints and budget deficits it

has been transformed into Public Private Participation and built operate and

transfer mechanism.

Since the needs of the corporate who undertake infrastructure finance is

large one. Corporate have different options like Market, Financial

institutions and Venture Capital to raise long term Finance. Now-a-Days

loans syndication is also used for mergers, acquisitions and takeovers. There

is a big structural change going on now in loans syndication market. Till

now there were no negotiations in loans syndication but now there are two

way quotes in loans in International Capital Markets. There are best prices

being given to both borrower and the lenders.



CHAPTER - 14

BIBILIOGRAPHY

(A) BOOKS REFERRED:

(1) INTERNATIONAL BANKING OPERATIONS -

MACMILLAN

(2) BANKING MANAGEMENT -

BHUPENDRA NAUTIYAL

(3) INTERNATIONAL BANKING AND FINANCE -

K.VISHWANATHAN

(4) INDIAN BANKING IN THE NEW MILLLENIUM -

M. P. SHRIVASTAVA, S. R. SINGH

(B) (B) WEBSITES:

(1) www.investopedia.com

(2) www.lsta.org

(3) www.wikipedia.org

(4) www.ebrd.org

Loan syndication

Education