A loan arranged by one or more lead banks and funded by a group of lenders, each directly a party to the credit agreement.
The longer version
Loan syndication is the funding of a single loan by a group of lenders under one credit agreement. A lead arranger structures the deal and recruits the other lenders, and an administrative agent handles payments, notices and communication with the borrower on the group's behalf.
Each syndicate member is a direct lender of record with its own commitment, its own share of the loan and its own rights under the credit agreement. Decisions are made by voting thresholds set in the agreement: routine consents by a majority of the lenders, and fundamental changes such as reducing principal or extending maturity by every affected lender.
Syndication lets a loan exceed what any one lender would hold, and lets each lender manage its exposure. It is common on large construction loans and portfolio financings, where a single balance sheet would not want the whole position.
It differs from a participation. In a syndication every lender has a direct relationship with the borrower. In a participation one lender makes the loan and sells interests in it to participants, who have no direct claim against the borrower and rely on the lead lender.
Common questions
- What is loan syndication?
- A loan funded by a group of lenders under one credit agreement, arranged by a lead lender and administered by an agent. Each lender is a direct lender of record for its share.
- What is the difference between loan syndication and a loan participation?
- In a syndication each lender is a party to the credit agreement with a direct claim against the borrower. In a participation a single lender makes the loan and sells interests in it, and participants rely on the lead lender rather than on the borrower directly.
- What does the administrative agent do in a syndicated loan?
- It collects and distributes payments, circulates notices and borrower reporting, runs consent and voting processes, and acts as the borrower's point of contact for the lender group.
- Why do lenders syndicate a loan?
- To fund loans larger than any one lender wants to hold, to spread risk, and to keep each lender within its concentration and hold limits.
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