Description
This is a presentation highlights the Nature of Corporate Banking, developments in Corporate Banking, consortium Finance, Multiple Banking Arrangements and Loan Syndication
1. 2. 3. 4. 5.
Nature of Corporate Banking Developments in Corporate Banking Consortium Finance Multiple Banking Arrangements Loan Syndication
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Corporate or Wholesale banking is an umbrella term encompassing the products and services that a commercial bank provides to its corporate customers. Specific products fall into one of the two categories: Historically, wholesale banks focused primarily on large and medium-sized businesses because the average dollar/rupee value of transactions in these segments was high.
? commercial credit ? Non-credit fee-based services
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Definition: A loan that is structured and supported specifically by the operation and performance of a specific business or enterprise is called a commercial loan There are 2 types of commercial loans:
? Business loans (or lines of credit): Loans to support the day-today operations of the business. ? Long-term commercial loans: The purposes for long-term commercial loans vary greatly, from purchases of major equipment and plant facilities to business expansion or acquisition costs. ? consortium finance ? multiple banking arrangements and ? loan syndication
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For larger loans, a single bank may not be able to finance the loan. In such situation, the loans are availed through:
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Relationship was previously dictated by banks, that selected business and imposed charges at will Today, corporates are becoming increasingly demanding. Corporates looks for:
? standardized services all round the year and round the clock from banks across all delivery channels and all locations ? ability to provide a full range of integrated products and services ? Technology: The ability to provide access to systems across the enterprise, via the Internet
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Participation loans/Consortium Finance mean joint finance by more than one bank to the same party against a common security. Under consortium financing, several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and follow-up exercises This participation of banks enables them to apply uniform standards, similar terms and conditions and exchange information with regard to credit proposals. All the participating banks have a pari passu charge (a charge ranking equally in priority) on the security and in the predetermined proportions. There are different types of consortia. To name a few:
? Several banks join in financing one borrower for working capital. ? Several financial institutions and/or banks join in financing fixed assets. ? When borrower with different units each engaged in separate line of production and each unit is financed by sub-consortium of banks under the consortium of banks for the borrower as a whole.
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Banks finance on a participation basis due to following reasons: a) resources of the banks do not permit large advances, particularly in the light of the credit control measures adopted by the RBI. (Banks cant lend more than 40% of their Net Worth and plus 10% for infrastructure as per current RBI Norms) b) banks are able to diversify their risk by participating in big advances
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Borrower discusses the proposal with the participating banks Collection and processing of information Sanctioning of proposal subject to terms & conditions – same for every bank Once borrowers? limits are decided, one bank acts as the “Lead Bank”, draws draft of the joint agreement, to execute the instrument
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A condition of the joint advance is that borrower will draw on his accounts with respective banks in same proportion as the limits sanctioned Transfer of pro rata business in the form of remittances, bills, foreign exchange
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The maximum and the minimum balance during the week/fortnight The balance on the last day of the week/fortnight/month Any other business including foreign exchange business passed by the borrower to any of the participating banks
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The maximum period of the joint finance If at any point of time the drawings in the account are not pro rata may call upon others to make necessary adjustment in this regard One of the concerned banks will be responsible for the recovery of the entire advance for the benefit of all The loss if any will be shared between the participating banks in the ratio of the amounts sanctioned and disbursed
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Balance Confirmation Letters - obtained by each bank every half year or at such intervals Stock Statements - The borrowers should send the periodical stock statements to each of the participating banks simultaneously Insurance - The insurance policies are kept with one of the banks Inspection - Usually each bank inspects the stocks by rotation Review - The working of the account and the limits should be reviewed from time to time Difference of Opinion among Participation Banks differences that may arise are resolved by mutual consultation. In case of a dissident bank, the bank may recall the debit balance due to it from the borrower and the borrower will have to consider an alternative source of finance
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Participation with Financial Institutions Other than Banks - advances by term lending institutions (TLIs) have become popular gradually due to large investments in industrial projects. Participation between TLIs and banks would provide following benefits - close contact the bank has with the borrower and the availability of the branch network. Large loans involving the IDBI, ICICI, IFCI and LIC, have joint financing arrangements. The main forum for coordinating the operation of these institutions in this respect is the monthly inter-institutional meeting of the senior executives under the auspices of the IDBI.
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Collective wisdom of banks in credit appraisal Smaller banks to benefit from borrower clientele For borrower: Speed of transaction Due to a larger volume of a transaction the margin is usually lower Reduced administration for the client - the whole sum is drawn through one Agent bank Flexibility of draw down and repayment schedule.
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Appraisal of credit proposal done by lead bank To submit proposal to RBI for post sanction scrutiny under „Credit Monitoring Arrangement? Decision of consortium will be binding on the Lead Bank, in case of differences Freedom to sanction an additional credit up to a pre-determined percentage in emergency Quarterly operative limits fixed in assocn. with next largest bank and communicated to member banks
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In the year 1978, RBI issued guidelines to the banks in conjunction with the formation of consortium and made it obligatory where the aggregate credit limits sanctioned to a single borrower amounted to Rs. 5 crore or more. But later in October 1993, this threshold limit was raised to Rs 50 crore In Oct „96 following policy of deregulation of financial sector, RBI decided that whenever a consortium is formed either on a voluntary or on an obligatory basis, the ground rules of the consortium arrangement would be formed by the participating banks on their own, subject to the exposure norms prescribed.
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Number of participating banks Minimum share of the bank Entry/exit from the consortium Sanction of additional/ad hoc limit in emergency situations/contingencies by Lead /other banks The fee to be charged by the lead bank for services rendered by it Grant of any facility to borrower by nonmember bank
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The exposure ceiling should be fixed in relation to bank?s capital funds and shouldn?t exceed 25% of capital funds in case of individual borrowers and 50% in case of a group. Group exposure may exceed to extent of 10% provided additional exposure is on account of investment in. power generation, telecom, roads, ports Capital funds for the purpose will comprise paid up capital and free reserves. Reserves, if any, created by revaluation of fixed assets etc., not to be included In case of foreign banks, ceiling shall be related for the present to foreign funds deployed in Indian business by such foreign banks Exposure shall include fund & non-fund based credit limits and underwriting and in similar commitments including investments. The sanctioned limit or outstandings whichever are higher shall be reckoned for arriving at exposure limit. However for non-fund based limits only 50% of such limits or outstandings whichever is higher shall be reckoned for arriving at exposure limit Further these ceilings stipulated by the RBI should be considered as a part of prudent credit management system and not a substitute for efficient credit appraisal, monitoring and other safeguards
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Lead banks should have the authority from other banks to make available their share of the credit limit, if they do not convey their decision to the Lead Bank in time. After first disbursement of loan, a customer should be allowed to operate the accounts with different banks according to his requirements The borrower should execute only one document with the Lead Bank There should be an interest agreement among banks of the consortium to share the security and the rights and responsibilities of the Lead Bank After the receipt of draft scheme, leader of the consortium should call for a consortium meeting to discuss and indicate the working capital assessment, the limits to be sanctioned and allocated among the members of the consortium After finalization of scheme by BIFR in the case of sick units, formal approval of the sanctioning authority should be obtained Before making any disbursement, the lead bank should ensure that disbursements are made only after complying
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On recommendation of Mahadevan Committee (Apr, 1988), Reserve Bank revised guidelines in relation to consortium advances by introducing “single window concept for lending” (SWCL), to minimize delay & inconvenience to borrower SWCL brought into operation in 2 areas– term loans and working capital finances Disbursement of rehabilitation term loan and additional working capital
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Borrower borrows from a number of banks under separate agreements and securities are charged to them separately Generally adopted while extending WC limits Bank which takes up the largest share of the is deemed to be the leader of consortium In case existing bank is unable to continue the advance, the borrowing company should make its own arrangements - by finding a new bank or
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In multiple banking security over an asset may be given to more than one lender (issue of priorities to be properly addressed) For working capital limits, the stock in trade and other current assets held by the company should be obtained as security Since it is possible that such security is charged to other financing banks, it should be ensured that the bank gets the paripassu charge among other financing banks.
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A syndicated credit is an arrangement between two or more lending institutions to provide a borrower a credit facility using common loan documentation Loan syndication is an alternative to consortium financing. Syndicated loans are most often for medium-term periods, which can mean from three to ten years. Banks engage in syndicated lending as they need to diversify their loan portfolio in respect of country, sector etc., both as a matter of commercial prudence and to comply with regulatory Capital Adequacy requirements.
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Loan syndication is done when
? a borrower wants to raise a relatively large amount of money quickly and conveniently ? if the amount exceeds the exposure limits of any one bank and the borrower does not want to deal with a large number of lenders.
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A prospective borrower intending to raise resources through this method awards a mandate to a bank commonly known as the „Lead Manager? The mandate details out the commercial terms of credit and the prerogatives of the mandated banks in resolving contentious issues in the course of transactions. The lead bank seeks to create a lending facility, defined by a single loan agreement, in which several or many banks participate.
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On receiving a mandate from the borrower, the lead manager prepares a placement (information) memorandum and the loan is marketed to other banks that may be interested in taking up the shares. The placement memorandum helps the banks
? to understand the transactions ? provides the information about the borrower.
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The information memorandum provides the basis for each lending bank making its own independent economic and financial evaluation of the borrower, if necessary, by seeking additional supporting information from other sources as well. Thereafter the mandated bank convenes a meeting to discuss the syndication strategy relating to coordination, communication and control within the syndication process and finalizes deal timing, charges towards management expenses and cost of credit.
Arranger/lead Manager/agent Bank: ? contact other banks and obtain commitments for the amount of the loan, i.e. to arrange the syndication. ? preparing the information memorandum and for organizing the completion of the loan. Participating bank: a) Participates in the syndication by lending a portion of the total amount required. Underwriting bank: a) Underwriting bank commits to supplying the funds to the borrower if necessary, from its own resources if the loan is not fully subscribed, it may be the arranging / lead bank, or another bank. b) Not all syndicated loans are fully underwritten
Agent:
? serves as an intermediary between the borrower and the other banks in the syndicate. ? As paying fees, interest, or capital to each lender directly is impractical, the borrower pays the agent bank, which then distributes the funds. ? When the borrower wishes to borrow funds under the loan agreement, it notifies the agent and the agent then requests funds from the other banks. ? The agent bank plays a vital role in administering the loan efficiently and in ensuring fairness in the relationship between the banks and the borrower. ? Receives fees from the borrower and paying appropriate shares where applicable to participating banks. The functions of the agent bank not relating to the flow of money are: ? Ensuring that conditions precedent are satisfied under the loan agreement before advancing any part of the loan. ? Determining the LIBOR interest rate for each interest period. ? Receiving notices relating to cancellation of any part of the loan. ? Receiving notices relating to transfers by banks.
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Each bank lends only the amount, known as the commitment, that it has agreed to make available. Therefore, each bank?s obligation is separate or in common law terminology “several”. If a bank fails to lend its agreed amount of the loan to the borrower, the other banks are not legally bound to make up the difference. The agent is often the same bank as the arranger.
The benefits to the borrowers: a. As the borrower deals with a single bank there is an element of confidentiality – he does not have to disclose financial information to the general public. b. Syndicated lending can be quicker and simpler than other ways of raising capital (e.g. issue of bonds or equity). Typically the facility can be in place within 8-10 weeks. c. The amount of money to be borrowed is usually larger than one can borrow from a single banker. d. In case of borrowings from a syndicate, there are relative advantages like centralized negotiations, single set of documentation, and one set of banking and other charges. e. The syndication method reverses the current practice where the corporate borrower faces rigid terms in a “take it or leave it” situation.
Benefits to the lead banks: a) Fees can be earned without committing scarce capital, b) Enhancement of bank's reputation and relationship with the client. Benefits to the participant banks: a)Access to lending opportunities without the associated costs of marketing and maintaining a high profile b) Market exposure for the bank c) Opportunities to participate in future syndications, possibly in a more senior role.
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Syndicated loans are available for medium term maturity. Sometimes transactions can be made for shorter periods of three to five years or longer periods of ten years or more. Drawdown Facility: ? facility allows the borrowers to drawdown the loan amount sanctioned to them over a period of time instead of withdrawing the entire amount at a time. ? a commitment fee (usually 1/4 percent to 1/2 percent on undrawn balances) is charged The interest on the syndicated loans is expressed as a margin over the interbank rate and the margin is expressed as basis points. ? LIBOR (London Interbank Offer Rate) is more prevalent ? Some borrowers also negotiate their loans in LIBID (London Interbank Bid Rate) or LIMEAN (the mean of LIBOR and LIBID). ? Apart from LIBOR, SIBOR (Singapore), PIBOR (Paris), NIBOR (New York) are also used to compute the actual interest rates.
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The credibility of the borrower is most important in deciding whether to grant loan on the basis of LIBOR or not. The more creditworthy the party is, the less is the spread over Libor. A syndicated loan would have two components: ? a funded component or core component on which interest will be charged on the loan being sanctioned ? a standby line of credit, which would meet the adhoc increases in credit needs of the borrower
Pre-mandate Phase: To prepare the groundwork for placing the loan in the market, the lead bank will need to: ? Identify the needs of the borrower. ? Design an appropriate loan structure, including safeguards such as covenants. ? Develop a persuasive credit proposal, both for internal purposes and for the prospective participants. ? Obtain internal approval from the bank?s credit committee. Award of the Mandate ? Placing of the loan: Now the lead bank can start to „sell? the loan in the marketplace. ? It will: ? Prepare a placement memorandum, a sales and information tool, containing background information on the borrower. Where the loan is for a specific project, this will include supporting commercial information on this. ? Prepare a term sheet that defines the pricing characteristics of the loan (e.g. lending margins, fee structure). The arranger may be allowed to exercise price or market flex – right to increase
Award of the Mandate (contd..) ? Prepare legal documentation for the loan. ? Approach selected banks and invite participation. Closing of the Syndication, Including Signing Ceremony ? Post-closure phase: ? The file for the syndicated loan is handed over to the facility agent. ? The agent now handles the day-to-day running of the loan facility – repayments, financial reporting and so on.
There are several types of instruments in the syndicated loan market. ? Term Loan: The most popular type is the term loan. It is a medium-term facility with a typical 6 or 7 years maturity. ? Revolving credit facility: A revolving credit facility gives the borrower more flexibility about how much principal is outstanding during the loan?s life. As tranches of the loan mature or are called, the borrower has the right to redraw up until the loan matures. ? Evergreen facility: A loan that can be extended after pre-set periods. For example, a five-year evergreen loan would be extendable every year for another year. ? Backstop facility: A backstop facility protects a company against a liquidity crunch. It is a loan drawn as the last resort. Many borrowers regard backstops as insurance so that in case they suffer a temporary shortfall in funds or a failure of one of their normal funding sources they can back on them. All issuers in the US commercial paper market are required to have a stand-by facility. ? Swingline: Most backstops also include a swingline facility which gives the borrower, the money on the same day. Enabling a firm to borrow up to a prespecified amount usually over 1-5 years. As repayments of outstanding balances are made, the loan facility is replenished.
The main elements within the syndication pricing structure will be: ? The interest due to participants – usually expressed as a margin over some market rate such as LIBOR. ? Compensation fees
Arrangement fee: Arrangement fee is a front-end fee. This is the total up-front fee paid to the banks that are mandated to arrange syndication for its work in structuring, syndicating and negotiating the documentation. Division of the Arrangement Fee
Praecipium: Charged by mandated bank as a fee for designing the loan and selling it to other banks Underwriting fee: If a loan is underwritten as opposed to a best
efforts placement, then members of the underwriting group are paid a flat fee based on their initial underwriting commitment prior to general syndication. Participation fee: This is an up-front fee paid to participant banks joining a facility in the syndication process and is payable on the amount of each banks? final commitment to the loan. Residual Pool: If there is a residual fee left after syndication this “pool” may also be distributed to the underwriting group.
Commitment fee: This is charged on the undrawn element of either a term loan or revolving credit to compensate banks for the contingent liability. The commitment fee is normally set at a level equal to half of the margin. However, it is unlikely that the fee will exceed 0.5%. Agency fee: This is an annual service charge paid to the agent bank for processing payments. Utilization fee: This is a fee the borrower should pay when the drawn portion exceeds 50%.
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Some Indian public sector banks and financial institutions entered the Syndicated Eurocredit markets in the early eighties Other companies followed the PSUs and by late eighties, there were several issues from even private companies Due to events like Gulf War and Balance of Payment issues, Euromarkets was governed by the regulations provided by the External Commercial Borrowings (ECB) regulations.
Euromarkets made a considerable progress by introducing innovations during the 1990s. Some of the innovations are: – Option-linked Loans: Under this, lenders buy options from borrowers to switch from the borrowing currency into a currency that is expected to appreciate during the life of the loan. The lenders benefit from the appreciation of the currency and the borrowers receive a premium to sell the options and seek a tradeoff against possible losses. – Dual Currency Loans: These are based on interest rate differentials between the currencies involved. A number of transactions can be arranged such that even though the loans are designated in hard currencies, interest payments can be swapped into soft currencies during the life of the loan. – Secondary Market Mechanism also emerged in the Euromarkets for securities, bonds or equity issues and Euroloans. This helps prevent the banks from getting stuck with certain positions and affords them an opportunity to trade in their positions.
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Corporate Banking is all about building genuine and lasting relationships with corporate customers. The convergence of investment, commercial banking and insurance would bring in real change and ease the pressures in the financial services industry.
doc_595396403.pptx
This is a presentation highlights the Nature of Corporate Banking, developments in Corporate Banking, consortium Finance, Multiple Banking Arrangements and Loan Syndication
1. 2. 3. 4. 5.
Nature of Corporate Banking Developments in Corporate Banking Consortium Finance Multiple Banking Arrangements Loan Syndication
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Corporate or Wholesale banking is an umbrella term encompassing the products and services that a commercial bank provides to its corporate customers. Specific products fall into one of the two categories: Historically, wholesale banks focused primarily on large and medium-sized businesses because the average dollar/rupee value of transactions in these segments was high.
? commercial credit ? Non-credit fee-based services
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Definition: A loan that is structured and supported specifically by the operation and performance of a specific business or enterprise is called a commercial loan There are 2 types of commercial loans:
? Business loans (or lines of credit): Loans to support the day-today operations of the business. ? Long-term commercial loans: The purposes for long-term commercial loans vary greatly, from purchases of major equipment and plant facilities to business expansion or acquisition costs. ? consortium finance ? multiple banking arrangements and ? loan syndication
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For larger loans, a single bank may not be able to finance the loan. In such situation, the loans are availed through:
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Relationship was previously dictated by banks, that selected business and imposed charges at will Today, corporates are becoming increasingly demanding. Corporates looks for:
? standardized services all round the year and round the clock from banks across all delivery channels and all locations ? ability to provide a full range of integrated products and services ? Technology: The ability to provide access to systems across the enterprise, via the Internet
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Participation loans/Consortium Finance mean joint finance by more than one bank to the same party against a common security. Under consortium financing, several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and follow-up exercises This participation of banks enables them to apply uniform standards, similar terms and conditions and exchange information with regard to credit proposals. All the participating banks have a pari passu charge (a charge ranking equally in priority) on the security and in the predetermined proportions. There are different types of consortia. To name a few:
? Several banks join in financing one borrower for working capital. ? Several financial institutions and/or banks join in financing fixed assets. ? When borrower with different units each engaged in separate line of production and each unit is financed by sub-consortium of banks under the consortium of banks for the borrower as a whole.
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Banks finance on a participation basis due to following reasons: a) resources of the banks do not permit large advances, particularly in the light of the credit control measures adopted by the RBI. (Banks cant lend more than 40% of their Net Worth and plus 10% for infrastructure as per current RBI Norms) b) banks are able to diversify their risk by participating in big advances
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Borrower discusses the proposal with the participating banks Collection and processing of information Sanctioning of proposal subject to terms & conditions – same for every bank Once borrowers? limits are decided, one bank acts as the “Lead Bank”, draws draft of the joint agreement, to execute the instrument
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A condition of the joint advance is that borrower will draw on his accounts with respective banks in same proportion as the limits sanctioned Transfer of pro rata business in the form of remittances, bills, foreign exchange
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The maximum and the minimum balance during the week/fortnight The balance on the last day of the week/fortnight/month Any other business including foreign exchange business passed by the borrower to any of the participating banks
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The maximum period of the joint finance If at any point of time the drawings in the account are not pro rata may call upon others to make necessary adjustment in this regard One of the concerned banks will be responsible for the recovery of the entire advance for the benefit of all The loss if any will be shared between the participating banks in the ratio of the amounts sanctioned and disbursed
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Balance Confirmation Letters - obtained by each bank every half year or at such intervals Stock Statements - The borrowers should send the periodical stock statements to each of the participating banks simultaneously Insurance - The insurance policies are kept with one of the banks Inspection - Usually each bank inspects the stocks by rotation Review - The working of the account and the limits should be reviewed from time to time Difference of Opinion among Participation Banks differences that may arise are resolved by mutual consultation. In case of a dissident bank, the bank may recall the debit balance due to it from the borrower and the borrower will have to consider an alternative source of finance
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Participation with Financial Institutions Other than Banks - advances by term lending institutions (TLIs) have become popular gradually due to large investments in industrial projects. Participation between TLIs and banks would provide following benefits - close contact the bank has with the borrower and the availability of the branch network. Large loans involving the IDBI, ICICI, IFCI and LIC, have joint financing arrangements. The main forum for coordinating the operation of these institutions in this respect is the monthly inter-institutional meeting of the senior executives under the auspices of the IDBI.
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Collective wisdom of banks in credit appraisal Smaller banks to benefit from borrower clientele For borrower: Speed of transaction Due to a larger volume of a transaction the margin is usually lower Reduced administration for the client - the whole sum is drawn through one Agent bank Flexibility of draw down and repayment schedule.
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Appraisal of credit proposal done by lead bank To submit proposal to RBI for post sanction scrutiny under „Credit Monitoring Arrangement? Decision of consortium will be binding on the Lead Bank, in case of differences Freedom to sanction an additional credit up to a pre-determined percentage in emergency Quarterly operative limits fixed in assocn. with next largest bank and communicated to member banks
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In the year 1978, RBI issued guidelines to the banks in conjunction with the formation of consortium and made it obligatory where the aggregate credit limits sanctioned to a single borrower amounted to Rs. 5 crore or more. But later in October 1993, this threshold limit was raised to Rs 50 crore In Oct „96 following policy of deregulation of financial sector, RBI decided that whenever a consortium is formed either on a voluntary or on an obligatory basis, the ground rules of the consortium arrangement would be formed by the participating banks on their own, subject to the exposure norms prescribed.
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Number of participating banks Minimum share of the bank Entry/exit from the consortium Sanction of additional/ad hoc limit in emergency situations/contingencies by Lead /other banks The fee to be charged by the lead bank for services rendered by it Grant of any facility to borrower by nonmember bank
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The exposure ceiling should be fixed in relation to bank?s capital funds and shouldn?t exceed 25% of capital funds in case of individual borrowers and 50% in case of a group. Group exposure may exceed to extent of 10% provided additional exposure is on account of investment in. power generation, telecom, roads, ports Capital funds for the purpose will comprise paid up capital and free reserves. Reserves, if any, created by revaluation of fixed assets etc., not to be included In case of foreign banks, ceiling shall be related for the present to foreign funds deployed in Indian business by such foreign banks Exposure shall include fund & non-fund based credit limits and underwriting and in similar commitments including investments. The sanctioned limit or outstandings whichever are higher shall be reckoned for arriving at exposure limit. However for non-fund based limits only 50% of such limits or outstandings whichever is higher shall be reckoned for arriving at exposure limit Further these ceilings stipulated by the RBI should be considered as a part of prudent credit management system and not a substitute for efficient credit appraisal, monitoring and other safeguards
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Lead banks should have the authority from other banks to make available their share of the credit limit, if they do not convey their decision to the Lead Bank in time. After first disbursement of loan, a customer should be allowed to operate the accounts with different banks according to his requirements The borrower should execute only one document with the Lead Bank There should be an interest agreement among banks of the consortium to share the security and the rights and responsibilities of the Lead Bank After the receipt of draft scheme, leader of the consortium should call for a consortium meeting to discuss and indicate the working capital assessment, the limits to be sanctioned and allocated among the members of the consortium After finalization of scheme by BIFR in the case of sick units, formal approval of the sanctioning authority should be obtained Before making any disbursement, the lead bank should ensure that disbursements are made only after complying
?
?
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On recommendation of Mahadevan Committee (Apr, 1988), Reserve Bank revised guidelines in relation to consortium advances by introducing “single window concept for lending” (SWCL), to minimize delay & inconvenience to borrower SWCL brought into operation in 2 areas– term loans and working capital finances Disbursement of rehabilitation term loan and additional working capital
?
? ?
?
Borrower borrows from a number of banks under separate agreements and securities are charged to them separately Generally adopted while extending WC limits Bank which takes up the largest share of the is deemed to be the leader of consortium In case existing bank is unable to continue the advance, the borrowing company should make its own arrangements - by finding a new bank or
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In multiple banking security over an asset may be given to more than one lender (issue of priorities to be properly addressed) For working capital limits, the stock in trade and other current assets held by the company should be obtained as security Since it is possible that such security is charged to other financing banks, it should be ensured that the bank gets the paripassu charge among other financing banks.
?
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A syndicated credit is an arrangement between two or more lending institutions to provide a borrower a credit facility using common loan documentation Loan syndication is an alternative to consortium financing. Syndicated loans are most often for medium-term periods, which can mean from three to ten years. Banks engage in syndicated lending as they need to diversify their loan portfolio in respect of country, sector etc., both as a matter of commercial prudence and to comply with regulatory Capital Adequacy requirements.
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Loan syndication is done when
? a borrower wants to raise a relatively large amount of money quickly and conveniently ? if the amount exceeds the exposure limits of any one bank and the borrower does not want to deal with a large number of lenders.
?
?
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A prospective borrower intending to raise resources through this method awards a mandate to a bank commonly known as the „Lead Manager? The mandate details out the commercial terms of credit and the prerogatives of the mandated banks in resolving contentious issues in the course of transactions. The lead bank seeks to create a lending facility, defined by a single loan agreement, in which several or many banks participate.
?
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On receiving a mandate from the borrower, the lead manager prepares a placement (information) memorandum and the loan is marketed to other banks that may be interested in taking up the shares. The placement memorandum helps the banks
? to understand the transactions ? provides the information about the borrower.
?
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The information memorandum provides the basis for each lending bank making its own independent economic and financial evaluation of the borrower, if necessary, by seeking additional supporting information from other sources as well. Thereafter the mandated bank convenes a meeting to discuss the syndication strategy relating to coordination, communication and control within the syndication process and finalizes deal timing, charges towards management expenses and cost of credit.
Arranger/lead Manager/agent Bank: ? contact other banks and obtain commitments for the amount of the loan, i.e. to arrange the syndication. ? preparing the information memorandum and for organizing the completion of the loan. Participating bank: a) Participates in the syndication by lending a portion of the total amount required. Underwriting bank: a) Underwriting bank commits to supplying the funds to the borrower if necessary, from its own resources if the loan is not fully subscribed, it may be the arranging / lead bank, or another bank. b) Not all syndicated loans are fully underwritten
Agent:
? serves as an intermediary between the borrower and the other banks in the syndicate. ? As paying fees, interest, or capital to each lender directly is impractical, the borrower pays the agent bank, which then distributes the funds. ? When the borrower wishes to borrow funds under the loan agreement, it notifies the agent and the agent then requests funds from the other banks. ? The agent bank plays a vital role in administering the loan efficiently and in ensuring fairness in the relationship between the banks and the borrower. ? Receives fees from the borrower and paying appropriate shares where applicable to participating banks. The functions of the agent bank not relating to the flow of money are: ? Ensuring that conditions precedent are satisfied under the loan agreement before advancing any part of the loan. ? Determining the LIBOR interest rate for each interest period. ? Receiving notices relating to cancellation of any part of the loan. ? Receiving notices relating to transfers by banks.
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Each bank lends only the amount, known as the commitment, that it has agreed to make available. Therefore, each bank?s obligation is separate or in common law terminology “several”. If a bank fails to lend its agreed amount of the loan to the borrower, the other banks are not legally bound to make up the difference. The agent is often the same bank as the arranger.
The benefits to the borrowers: a. As the borrower deals with a single bank there is an element of confidentiality – he does not have to disclose financial information to the general public. b. Syndicated lending can be quicker and simpler than other ways of raising capital (e.g. issue of bonds or equity). Typically the facility can be in place within 8-10 weeks. c. The amount of money to be borrowed is usually larger than one can borrow from a single banker. d. In case of borrowings from a syndicate, there are relative advantages like centralized negotiations, single set of documentation, and one set of banking and other charges. e. The syndication method reverses the current practice where the corporate borrower faces rigid terms in a “take it or leave it” situation.
Benefits to the lead banks: a) Fees can be earned without committing scarce capital, b) Enhancement of bank's reputation and relationship with the client. Benefits to the participant banks: a)Access to lending opportunities without the associated costs of marketing and maintaining a high profile b) Market exposure for the bank c) Opportunities to participate in future syndications, possibly in a more senior role.
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Syndicated loans are available for medium term maturity. Sometimes transactions can be made for shorter periods of three to five years or longer periods of ten years or more. Drawdown Facility: ? facility allows the borrowers to drawdown the loan amount sanctioned to them over a period of time instead of withdrawing the entire amount at a time. ? a commitment fee (usually 1/4 percent to 1/2 percent on undrawn balances) is charged The interest on the syndicated loans is expressed as a margin over the interbank rate and the margin is expressed as basis points. ? LIBOR (London Interbank Offer Rate) is more prevalent ? Some borrowers also negotiate their loans in LIBID (London Interbank Bid Rate) or LIMEAN (the mean of LIBOR and LIBID). ? Apart from LIBOR, SIBOR (Singapore), PIBOR (Paris), NIBOR (New York) are also used to compute the actual interest rates.
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The credibility of the borrower is most important in deciding whether to grant loan on the basis of LIBOR or not. The more creditworthy the party is, the less is the spread over Libor. A syndicated loan would have two components: ? a funded component or core component on which interest will be charged on the loan being sanctioned ? a standby line of credit, which would meet the adhoc increases in credit needs of the borrower
Pre-mandate Phase: To prepare the groundwork for placing the loan in the market, the lead bank will need to: ? Identify the needs of the borrower. ? Design an appropriate loan structure, including safeguards such as covenants. ? Develop a persuasive credit proposal, both for internal purposes and for the prospective participants. ? Obtain internal approval from the bank?s credit committee. Award of the Mandate ? Placing of the loan: Now the lead bank can start to „sell? the loan in the marketplace. ? It will: ? Prepare a placement memorandum, a sales and information tool, containing background information on the borrower. Where the loan is for a specific project, this will include supporting commercial information on this. ? Prepare a term sheet that defines the pricing characteristics of the loan (e.g. lending margins, fee structure). The arranger may be allowed to exercise price or market flex – right to increase
Award of the Mandate (contd..) ? Prepare legal documentation for the loan. ? Approach selected banks and invite participation. Closing of the Syndication, Including Signing Ceremony ? Post-closure phase: ? The file for the syndicated loan is handed over to the facility agent. ? The agent now handles the day-to-day running of the loan facility – repayments, financial reporting and so on.
There are several types of instruments in the syndicated loan market. ? Term Loan: The most popular type is the term loan. It is a medium-term facility with a typical 6 or 7 years maturity. ? Revolving credit facility: A revolving credit facility gives the borrower more flexibility about how much principal is outstanding during the loan?s life. As tranches of the loan mature or are called, the borrower has the right to redraw up until the loan matures. ? Evergreen facility: A loan that can be extended after pre-set periods. For example, a five-year evergreen loan would be extendable every year for another year. ? Backstop facility: A backstop facility protects a company against a liquidity crunch. It is a loan drawn as the last resort. Many borrowers regard backstops as insurance so that in case they suffer a temporary shortfall in funds or a failure of one of their normal funding sources they can back on them. All issuers in the US commercial paper market are required to have a stand-by facility. ? Swingline: Most backstops also include a swingline facility which gives the borrower, the money on the same day. Enabling a firm to borrow up to a prespecified amount usually over 1-5 years. As repayments of outstanding balances are made, the loan facility is replenished.
The main elements within the syndication pricing structure will be: ? The interest due to participants – usually expressed as a margin over some market rate such as LIBOR. ? Compensation fees
Arrangement fee: Arrangement fee is a front-end fee. This is the total up-front fee paid to the banks that are mandated to arrange syndication for its work in structuring, syndicating and negotiating the documentation. Division of the Arrangement Fee
Praecipium: Charged by mandated bank as a fee for designing the loan and selling it to other banks Underwriting fee: If a loan is underwritten as opposed to a best
efforts placement, then members of the underwriting group are paid a flat fee based on their initial underwriting commitment prior to general syndication. Participation fee: This is an up-front fee paid to participant banks joining a facility in the syndication process and is payable on the amount of each banks? final commitment to the loan. Residual Pool: If there is a residual fee left after syndication this “pool” may also be distributed to the underwriting group.
Commitment fee: This is charged on the undrawn element of either a term loan or revolving credit to compensate banks for the contingent liability. The commitment fee is normally set at a level equal to half of the margin. However, it is unlikely that the fee will exceed 0.5%. Agency fee: This is an annual service charge paid to the agent bank for processing payments. Utilization fee: This is a fee the borrower should pay when the drawn portion exceeds 50%.
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Some Indian public sector banks and financial institutions entered the Syndicated Eurocredit markets in the early eighties Other companies followed the PSUs and by late eighties, there were several issues from even private companies Due to events like Gulf War and Balance of Payment issues, Euromarkets was governed by the regulations provided by the External Commercial Borrowings (ECB) regulations.
Euromarkets made a considerable progress by introducing innovations during the 1990s. Some of the innovations are: – Option-linked Loans: Under this, lenders buy options from borrowers to switch from the borrowing currency into a currency that is expected to appreciate during the life of the loan. The lenders benefit from the appreciation of the currency and the borrowers receive a premium to sell the options and seek a tradeoff against possible losses. – Dual Currency Loans: These are based on interest rate differentials between the currencies involved. A number of transactions can be arranged such that even though the loans are designated in hard currencies, interest payments can be swapped into soft currencies during the life of the loan. – Secondary Market Mechanism also emerged in the Euromarkets for securities, bonds or equity issues and Euroloans. This helps prevent the banks from getting stuck with certain positions and affords them an opportunity to trade in their positions.
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Corporate Banking is all about building genuine and lasting relationships with corporate customers. The convergence of investment, commercial banking and insurance would bring in real change and ease the pressures in the financial services industry.
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