Syndicated Loans And Other Banking Products

The most common form of international lending by commercial banks is the Syndicated Floating Rate Loan. This can be defined as a medium-to long-term financing provided by several banks with common loan documentation with a variable interest rate.  The most common pricing benchmark is the LIBOR (London Inter-Bank Offered Rate) in the relevant currency and the loan document states interest rate as LIBOR plus a margin or spread e.g. LIBOR + 1.5%.  A traditional syndicated loan is usually a floating rate loan with fixed maturity, a fixed draw-down period and a specified repayment schedule. A typical eurocredit would have maturity between five and 10 years, amortization in semi annual installments, and interest rate reset every three or six months with reference to LIBOR + 1.5%.  A traditional syndicated loan is usually a floating rate loan with fixed maturity, a fixed draw-down period and a specified repayment schedule. A typical eurocredit would have maturity between five and 10 years, amortization in semi annual installments, and interest rate reset every three or six months with reference to LIBOR.

Syndicated credits can be structured to incorporate various options. As in the case of FRNs, a drop-lock feature converts the floating rate loan into a fixed rate loan if the benchmark index hits a specified floor.  There are usually three categories of bank in a loan syndicate. There are lead banks, managing banks and participating banks. In large credits, there is a separate group called co-managers. This group comprises participating banks providing more than a specified amount of funds. Most loans are led by one or two major banks which negotiate to obtain a mandate from the borrower to raise funds. After the preliminary stages of negotiation with a borrower, the lead bank begins to assemble the management group, which commits itself to provide the entire amount of the loan, if necessary. Portions of the loan are then marketed to participating banks.  Additionally, a reserve requirement clause is inserted, stipulating that an adjustment will be made if the cost of funds increases because reserve requirements are imposed or increased.