Thomas Barwick / Getty Images Government bodies might borrow for massive infrastructure improvements requiring hundreds of millions of dollars. A company might borrow to purchase equipment or build sophisticated facilities for large-scale manufacturing. Businesses use these loans to buy other companies, and they also obtain syndicated loans to refinance existing debts. Lenders include large financial institutions, such as banks and finance companies, as well as institutional investors who want to earn interest by participating in syndicates. In some cases, the lenders sell their interests or assign the loan to other investors so they can replenish cash and reduce their exposure to any individual borrower.
How Syndicated Loans Work
When an individual lender is unable or unwilling to fund a particularly large loan, borrowers can work through one or more lead banks to arrange to finance. That syndicate manager works with the borrower to arrive at interest rates, payment terms, and other details described in a term sheet.
From a Borrower’s Perspective
Syndicated loans make it relatively easy to borrow a significant amount. The borrower can secure funding with one agreement instead of attempting to borrow from several different lenders individually.
From a Lender’s Perspective
Lenders can stay diversified but still participate in large, high-profile deals. What’s more, they gain access to industries or geographic markets that they don’t ordinarily work with. These loans are contractual obligations, making them similar to other senior sources of capital, and they may even be secured with collateral.
Types of Syndicated Loans
Loans come in a variety of forms, and a single loan might have several different types of debt.
Revolving Debt
This allows borrowers to take only what they need when they need it, and come back for more later. Lenders set a maximum credit limit, and borrowers may be able to borrow and repay repeatedly (or “revolve” the debt) against a line of credit.
Term Loans
These provide one-time financing that borrowers typically pay off gradually with fixed payments. Some term loans feature a large balloon payment at maturity instead of amortizing payments.
Letters of Credit (LOCs)
These bank guarantees provide security to a party the borrower is working with. For example, a standby letter of credit might protect a municipality that pays millions of dollars for an infrastructure project, but the contractor fails to complete the project. The LOC would provide funds to the municipality (at the contractor’s expense), enabling them to pay other contractors or fix the problem in other ways.
Delayed-Draw Lines
These are approved funding lines that borrowers use over a period of time for planned expenditures.
Other Arrangements
A syndicated loan might feature several different terms. For example, a loan might have a portion of the debt due in seven years, with the remainder due after ten years. Those loans also might have fixed interest rates for the life of the loan or variable interest rates that fluctuate with an index such as the prime rate.
Notable Happenings
In 2018, Broadcom sought $100 billion in a record-breaking syndicated loan. The company was seeking to buy Qualcomm at the time for $121 billion. To secure funding, Broadcom was to work with some of the largest financial institutions in the world, including:
Bank of America Merrill LynchCitigroupDeutsche BankJP MorganMizuhoMitsubishi UFJ Financial GroupSumitomo Mitsui Banking CorporationWells FargoScotiabankBMO Capital MarketsRBC Capital MarketsMorgan Stanley
Although those banks are large, they entered into a loan syndicate in which each bank provided a portion of the credit to the company. As a result, the credit risk was spread out between all of the banks within the syndicate—the risk being limited to their share of the loan. As in the case of Broadcom, some of the lenders were looking to derisk by selling their portion of the loan. In this way, the syndicate banks earned the fee income for handling the underwriting and origination risks but didn’t have to hold the debt on their books. The $100 billion would pay for the Qualcomm purchase as well as the costs associated with transitioning Qualcomm operations into Broadcom. The deal was expected to include several segments, including:
$20 billion for one year$4.477 billion for two years$19.679 billion for three yearsAnother $19.679 billion for five years$5 billion as a five-year revolving credit facility
Interest rates ranged from 1% to 1.37% over LIBOR, so they were variable-rate loans, and they had a maximum term of five years. However, the deal was quashed after President Trump signed an order prohibiting it because of national security concerns.
