INTERNATIONAL LOAN SYNDICATIONS:
International bank lending one of the most efficient methods of providing
large-sized credits, regardless of the purposes of the funds,
is loan syndication. Syndicated loan a group of financial institutions
(usually banks) make funds available on common terms and conditions
to one borrower. The amount of funds committed by each lender
may be different. To facilitate the formation of such loan,
the borrower designates a lead bank which then manages the syndication
Syndicated loans are attractive for both lenders and borrowers.
For lenders, a syndicated Loans is convenient tool to spread
credit risk among many lenders. For borrowers, if provides the
means to raise a large amount of funds on competitive terms
within a short period. The accepting houses in London have generally
been credited for initiating Eurocurrency loan syndications.
Most commercial banks, notably from United States, The United
kingdom, Canada, Germany, and Japan have become the dominant
force acting as lead banks facilitating Eurocurrency loan syndication.
This shift in dominance from accepting houses to commercial
banks is largely due to the fact that accepting houses with
their limited financial resources primarily relied on the best
effort basis, whereas commercial bank with larger assets resources
were able to make firm commitments.
The loan syndication process begins with an instruction given by the borrower
to the lead bank to form Loans
syndication. In choosing a lead bank, the borrower employs several
Experience of the lead bank in syndication
Prior ties with the borrower
Geographic proximity of the bank to the borrower
Size of the bank
The country of the currency in demand
Willingness to bid even under some difficult or sometimes questionable situations.
These factors in a broader sense are the elements needed to ensure a successful syndication.
In narrower sense, some of the factors, particularly the first three
are important for the borrower to reduce the problem of measuring
the extent of the lead banks effort in syndication which is
not observable. Even if the borrower can acquire some information
about the lead banks effort to obtain better terms and conditions
for the proposed loan, it is given only by the observed outcome,
which depends not only on the effort of the lead bank but also
the state of the market. Experience in market, prior ties with
the borrower, and geographic proximity of the bank Loans to the borrower all enables the borrower to have a
better sense of the lead banks performance.
The lead bank tests the marketability of the proposed loan and then submits a letter of intent in which the basic terms and conditions of the proposed loan are stipulated. The basic information in the letter includes a) the borrower b) the purpose of the loan c) the loan amount d) the terms and conditions e) syndication fees f) the lead banks responsibilities. Special provisions are those special clauses to be included in the loan agreement primarily to protect lenders individually as well as collectively, such as yield protection, waiver of sovereign immunity, cross-defaults, negative pledge, and sharing clause among others. Syndication assignment, the lead bank may offer terms and conditions that are too favorable, only later finding it difficult to sell purchased instrument without incurring losses. This is known as underwriting risk, which originates from the unknown demand curve.
Once the letter of intent is accepted by the borrower, it then becomes a firm mandate. Based on the firm mandate, the lead bank sends out the offering telex or fax, known as an offer sheet, to prospective lenders. The offer sheet contains basically the same information as in the firm mandate. Upon receiving favorable responses, the lead bank sends out a placement memorandum, which is printed brochure giving more detailed information usually on three parts
a) The borrower and the project for which the Loans is intended
b) The detailed terms and conditions of the loan
c) Proposed loan agreement.
The lead bank and management group banks receive proportionally higher points (advance interest payment) in the name of the managers fee and they share residual underwriting profit. The lead bank is also rewarded for obtaining the mandate.
Whether or not banks participate in this particular loan syndication depends on a number of factors such as
a) Prior knowledge of the lead bank and the borrower
b) The portfolio and country limit of the lender
c) The desire to do business with this borrower
d) The liquidity in the European currency market.
Some Japanese banks lending to Indian corporate are the Sumitomo group and Mizuho group.
Also, the competitive interest rate offered by overseas lenders is an added attraction for Indian corporate.
"Local lending rates have gone up sharply because of the rate hike and banks running out of capital. So, the difference between domestic and overseas rates can be as much as 75-100 basis points on a full currency swap loan," Mr. Dave said.
As risks of lending increase due to rising interest rates, banks are also looking at loan syndication as an important contributor to their fee income.
Mr. Dave expects the onshore syndication market to grow 20-30 per cent and the offshore market to grow over 30 per cent this year, in line with the market growth.
THE country's lead financial institutions are back in the international loan
syndication market with the Industrial Development Bank of India
(IDBI) having launched a deal to refinance
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