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project on loan syndication withe reference to icici bank

project on loan syndication withe reference to icici bank

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    Sr 2 2_2 Sr 2 2_2 Document Transcript

    • Loan Syndication Project on LOAN SYNDICATION With the Reference To ICICI Bank SUBMITTED BY ANURAG D. PANDEY ROLL NO. 5509 GUIDE BY MR.SANTOSH YADAV Page 1
    • Loan Syndication INDEX SR.NO 1. 2 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. CONTENTS Executive summary Introduction Meaning Of Loan Meaning Of Syndication Introduction To Loan Syndication Features Of Loan Syndication Stage In The Loan Syndication Process Reasons/Purpose For Syndicated Lending Advantages Of Syndicated Lending Project Finance And Loan Syndication Parties And Their Role Within The Syndication Process Loan Syndication Financial Institutions Loan Depot The Syndicated Loan Market Overview of ICICI Bank History Of ICICI Bank ICICI Syndication Syndication Advisory And Other Services Conclusion Webloigraphy PAGE NO 1 3 4 5 9 11 13 14 16 19 21 23 25 29 30 32 35 42 43 Page 2
    • Loan Syndication DECLARATION I MR.ANURAG D. PANDEY student of T.Y.B.COM (BANKING AND INSURANCE) (SEMESTER V) of SAKET COLLAGE OF ART,SCIENCE AND COMMERCE hereby declare that I have completed the project on LOAN SYNDICATION in the academic year 2013-2014. The information submitted is true and original and to the best of my knowledge. Page 3
    • Loan Syndication Executive summary A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment known as arrangers. The syndicated loan market is the dominant way for corporations in the U.S. and Europe to tap banks and other institutional financial capital providers for loans. The Indian market originated with the large leveraged buyout loans of the mid-1980s,[and Europe's market blossomed with the launch of the euro in 1999. At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowers—issuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins above the relevant LIBOR in the U.S. and UK, Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions. In the U.S., corporate borrowers and private equity sponsors fairly evenhandedly drive debt issuance. Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, who, in turn, determine many of the standards and practices of loan syndication Page 4
    • Loan Syndication CHAPTER:1 INTRODUCTION Banks play an important role in the economic development of a nation. banks provide a number of functions. The term bank comes from the word ‘BANCO‘ which means a bench. In earlier days European money lenders used to display coins of different countries in big heaps on benches or tables for the purpose of lending or exchanging.It receives money from those who want to save in the form of deposits and lends the money to those who need it.The primary functions of the bank are known as banking functions and the secondary functions of the bank are known as non-banking functions. A Bank is a financial institution which deals with deposits and advances and other related services. The term banking has undergone tremendous changes over the years. The traditional and commercial banking activities of accepting deposits and lending have been replaced by the concept of universal banking and now international banking. Banks are expanding their operations, entering new markets and trading in new asset types. The change in financial system has created new opportunities along with new risks. The banks plays a vital role in modern business without banks, it would be highly difficult to conduct business activities in a smooth manner. A bank is a vital aid-to-trade. Thus bank is an evolutionary concept. It acts as a connected link between borrowers and lenders of money. For the past three decades India‘s banking system has several outstanding achievements to its credit. The most striking feature is its extensive reach. It is no longer confined to metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote countries of the world. This is the main reason of India‘s growth process. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are the days when the most efficient bank transferred money from one branch to another in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The modern day banking consist of all activities viz .accounts of non residents, financing exports and imports, financing in foreign currencies, cross border financing, syndication of loans and many other activities. Page 5
    • Loan Syndication With the introduction of new products and services in the banking sector it has made the life of a common man more simple and easy. Innovation in banking:TECHNOLOGY FOR VALUE CREATION 1) 2) 3) 4) Internet Banking Mobile Banking Payment and Settlement Systems(RTGS) Benefits of Technology in Banking RURAL INDIA CATCHING UP 1) Micro Finance and Self Help Groups BANKING BEYOND BANKING 1) 2) 3) 4) 5) Personal Banking Retail Banking NRI Services Banc assurance Any Branch Banking THE CHANGING FACE OF BANKING 1) Universal banks 2) Smart Cards 3) Outsourcing BPO The banking sector is an upcoming sector in the market these days with the innovation of new techniques and opening up of new branches around the country. Their main aim is at consumer satisfaction. It is a sector of great importance to the common man and it continues to expand in leaps and bounds everyday. The banks are rightly called as ―nerve centers of business‖ and backbones of modern industries and commerce. Page 6
    • Loan Syndication Meaning of the term Loan A loan is a type of debt. All material things can be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. It is also defined as: Something lent for temporary use.  A sum of money lent at interest.  For example: - An act of lending; a grant for temporary use: asked for the loan of a garden.  A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan from the main office.  Loans represent the majority of a bank‘s assets. a bank can typically earn a higher rate of interest on loans than on securities. Loans however, come with risk. If a bank makes bad loans to consumers or businesses, the banks may suffer on defaulter of repayments. -Loan is an advance paid by the bank to the customer either with security or without security is called as loan. If a loan is given without security it is called as an advance. It is given for a fixed period of time and aggregate rate of interests. Repayments are spread over from a period of 1-5 years. It is also known as demand loan and it is repayable on demand. -The loans are granted to meet long term working capital needs and for expansion and modernization. Interest is charged on the actual amount sanctioned, whether withdrawn or not. Loans may be short-term, medium-term or loan term. Long term loans are generally for meeting the working capital requirements. Such loans are also called as term loans. When a loan is meant for meeting both fixed and working capital requirement of a borrower, it is called as a ―Composite loan‖. Advantages of the loan system are as follows;      Financial discipline on the borrower Periodic review of local Account Profitability The system is quite simple It is given for a fixed period and specific purpose. Page 7
    • Loan Syndication INTRODUCTION TO LOAN SYNDICATION  Loan syndication refers to services rendered by an organization in arranging and procuring credit from financial institutions, banks, other lending and investment companies for financing the project or meeting the working capital requirements.  The loan syndication work involves identification of sources where from funds would be arranged, approaching these sources with requisite application and supporting documents and complying with all the formalities involved in the sanction and disbursal of loan.  In loan syndication there is a leader bank who undertakes all the duties and functions of finance. The fees charged by merchant banker for undertaking loan syndication varies upto one percent of the total loan amount.  Syndicated loans provide borrowers with a more complete menu of financing options. In effect, the syndication market completes a continuum between traditional private bilateral bank loans and publicly traded bond market.  Loan syndications is responsible for arranging co-financing with commercial banks and other financial institutions directly or indirectly with export credit agencies (ECA‘S).  Loan syndications has chosen a flexible and market oriented approach. Page 8
    • Loan Syndication  Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. Such loans may be obtained from a single financial institution or a syndicate or consortium.  Merchant bankers provide help to corporate clients to raise syndicated loans from commercial banks. Merchant bankers help corporate clients to raise syndicated loans from commercial banks.  Merchant banking is an institution which covers a wide range of activities such as portfolio management, credit syndication, and corporate advisory services. They help clients approach financial institutions for term loans.  The Loan Syndications team includes dedicated professionals in Chicago, New York, Toronto and London who are active in the bank market and have an in-depth knowledge of the current trends in loan pricing, structure and trading activities.  As the size of the individual loans increased, individual banks found it difficult to take the risk single handed- regulatory authorities in most countries limit the size of the individual exposures. Hence the practice of inviting other banks to participate in the loan, to form a syndicate, came into being; thus the term ―Syndicated loans‖  A loan syndicate refers to the negotiation where borrowers and lenders sit across the table to discuss about the terms and conditions of lending. At present Large groups of banks are forming syndicates to arrange huge amount of loans for corporate borrowers.  The need for syndication arises as the size of the loan is huge and a single bank cannot bear the whole risk of lending. Also the corporate going for the issue is not aware about the banks which are willing to lend. Hence syndication assumes significance.  In the case of syndication the risk gets diversified. The process of syndication starts with an invitation for bids from the borrower. The borrower mentions the funds requirement, currency, tenor etc. the mandate is given to a particular bank or an institution that will take the responsibility of syndicating the loan by arranging for financing the banks. Page 9
    • Loan Syndication  Syndication is done on a best effort basis or on underwriting basis. It is usually the lead manager who acts a syndicator of loans. The lead manager has dual tasks i.e. formation of syndicate documentation and loan agreement.  Common documentation is signed by the participating banks on the common terms and conditions.  The advantages of syndicated loans are the size of the loan, speed and certainty of funds, maturity profile of the loan, flexibility in repayment, lower cost of funds, diversity of currency, simpler banking relationships and possibility of renegotiation.  Syndicated loans are loans made by two or more lenders and administered by a common agent using similar terms and conditions and common documentation.  According to Business Credit, most loan syndications take the form of a direct-lender relationship, in which the lead lender is the agent for the other lenders in the origination and administration of the loan, and the other lending banks are signatories to the loan agreement.  In the last several years the popularity of this type of loan has exploded. By 2000, the total annual volume of syndicated loan issuance had risen to $1.2 trillion, a $100 billion increase over the year before. The businesses that are choosing this option to finance their growth have expanded beyond the Fortune 500 companies that were its first users.  They have now become a flexible funding source for both midsized companies and smaller companies that are on the cusp of moving into mid-sized status.  The simple reality is that "Companies can given these obstacles, business owners and executives often express interest in syndicated loans, which offer consolidation of effort and the possibility of making new banking contacts. Lenders support their use as well. Lenders like syndications because they permit them to make more loans, while limiting individual exposures and spreading their risk within portfolios more widely. "Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants." Page 10
    • Loan Syndication  Borrowers taking out syndicated loans pay upfront fees and annual charges to the participating banks, with interest accruing (on a quarterly, monthly, or semiannual basis) from the initial drawdown date. "One advantage of syndication loans is that this market allows the borrower to access from a diverse group of financial institutions,‖ In general, borrowers can raise funds more cheaply in the syndicated loan market than they can borrowing the same amount of money through a series of bilateral loans. Syndicated loans are a special category of loans in which an arranger, or group of arrangers, forms a group of creditors on the basis of a mandate to finance the debtor. The debtor is usually a company with an excellent rating. The debtor chooses this type of loan primarily because the required loan volume exceeds the possibilities of one creditor through bilateral financing, both from the perspective of a risk analysis of the debtor‘s position as well as the creditor‘s strategy. Despite the fact that the debtor and creditors only enter into one contract, the creditors‘ rights and obligations are several and independent of each other. for funding project finance deals, especially when it involves large sums. This is especially Loan syndication is a funding mechanism where two or more banks come together contribute a portion of the loan to finance the project. Loan syndication1 is the most common form used true for energy and infrastructure projects. The implementation of the planned project depends on the availability of funds to finance it from start to completion. Equity2 contribution is usually limited and the project is usually financed by debt for a large proportion of its finance structure, sponsors therefore must ensure that funds are available before the project starts. The project finance is based on limited or non-recourse3 to sponsors, therefore repayment of the loan is based on the isolated and assignable cash flow from the project4. Therefore banks need assurance to the effect that the project will be able to generate revenue after its completion phase before committing funds to the project. This is done by ensuring that the project has an off-taker5, commitment by sponsors through various covenants and representations, input supply contract (fuel or gas in case of power projects), engineering, procurement and construction contract and government support undertakings. Loan syndication as a project financing mechanism has been increasing over the last decade (see graph 1), despite the transactions costs involved in securing the loan agreement of all the Page 11
    • Loan Syndication participating parties in the syndicate. Schure, et al (2006) show that banks extended syndicated loans equivalent to US $2 trillion in 2003. The question is whether syndicated loan have benefited all the counterparties. The main objective of this paper is to examine the role of loan syndication in project financing. The motivation for this research paper stems from the importance of credit in the project finance structure and the growing importance of syndicated loan structures in project financing. The paper has investigated the benefits syndicated loans offer to both lenders and borrowers in order to maximise the returns on debt and equity respectively. To achieve the objective, the paper analysed the literature on the roleof loan syndication to derive the conclusions. Page 12
    • Loan Syndication Meaning of syndication  An association of individuals formed for the purpose of conducting a particular business or a joint venture.  Pooling of resources by financial institutions in a financing project to spread the risk. Individual return from the investment is proportionate to the degree of risk or amount of funds that each has put up or underwritten.  A syndicate is a general term describing any group that is formed to conduct some type of business. For example, a syndicate may be formed by a group of investment bankers who underwrite and distribute new issues of securities or blocks of outstanding issues. Syndicates can be organized as corporations or partnerships.  A Syndicated loan (or‘syndicated bank facility‘) is a large loan in which a group of banks work together to provide funds for a borrower. There is usually one lead bank (the "Arranger" or "Agent") that takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.  A syndicate only works together temporarily. They are commonly used for large loans or underwritings to reduce the risk that each individual firm must take on.  It can also be termed as an association of people or firms formed to engage in an enterprise or promote a common interest or an association of people or firms authorized to undertake a duty or transact specific business.  The cost of a syndicated loan consists of interest and a number of fees-management fees, participation fees, agency fees and underwriting fees when the loan is underwritten by a bank or a group of banks. Spreads over LIBOR depend upon borrower's credit worthiness, size and term of the loan, state of the market (e.g. the level of LIBOR, supply of non-bank deposits to the EURO banks,) and the degree of competition for the loan. Page 13
    • Loan Syndication Overview of Loan Syndication Loan syndicated facilities for project financing has been increasing since 1992. In 1992, a Total of US $194.1 billion were signed as loan syndicate credit facilities, which have since Increased to $2,666.62 billion in 2007 (see Graph 1). In 2008, syndicated loan facilities Reduced by 37% in 2008 due to the financial crisis which especially affected credit facilities In the last quarter of 2008. In 2001 to 2003, syndicated loans reduced by 9%, 7% and 10% Due to the September 11, 2001 attack on the USA. However, it picked in 2004 with a growth Rate of 38% (see appendix one). It is evident from the syndicated loan data that international Developments affect credit facilities as they increase the risk of lending and reduce international financial flows Figure 1: Syndicated Loans Facilities Page 14
    • Loan Syndication CHPTAER:2 STAGES IN SYNDICATION PRE-MANDATE STAGE PLACING THE LOAN AND DISBURESEMENT POST-CLOSURE STAGE Broadly there are three stages in syndication, viz., Pre-mandate phase, Placing the loan and disbursement and post-closure stage. 1) PRE-MANDATE STAGE: - This is the initiated by the prospective borrower. It may liaise with a single bank or it may invite competitor‘s bids from a number of banks. The borrower has to mandate the lead bank, and the underwriting bank, if desired. Once the lead bank is selected and mandated by the borrower, the lead bank has to undertake the appraisal process. the lead banks needs to identify the needs of the borrower, design an appropriate loan structure, and develop a persuasive credit proposal. Page 15
    • Loan Syndication PLACING THE LOAN AND DISBURSEMENT: - At this stage, the lead bank can start to sell the loan in the marketplace i.e. to prospective participating banks. this means that the lead bank needs to prepare an information memorandum, prepare a term sheet, prepare legal documentation, approach selected banks and invite participation. A series of negotiations with the borrower are undertaken if prospective participants raise concerns. To conclude this stage the lead bank must achieve closing of the syndication, including signing. If need be, underwriting bank has to sign the balance portion of the loan. Loan is disbursed in phases as agreed in the loan contract. Loan is disbursed in ‗no-lien‘ account i.e. a bank account created exclusively to disburse loan. This account and its withdrawals are monitored by banks. This is to ensure that the loan is used only for the purpose defined in the loan agreement and that the funds are not diverted to any other purpose. 3) POST-CLOSURE STAGE:- This is monitoring and follow-up phase. It has many times done through an escrow account. Escrow account is the account in which the borrower has to deposit it‘s revenues and the agent ensures that the loan repayment is given due priority before payments to any other parties. Hence in this stage, the agent handles the dayto-day running of the loan facility. Page 16
    • Loan Syndication Reasons/Purpose for syndicated lending Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If the bank's cost of funds is a hypothetical 5%, the bank needs to charge more than 10% interest on the loan to make a profit. In general, banks and the financial markets use risk -based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans, however, is that there are fewer of them. So, if the bank has the only large business loan and if that busi ness happens to be one of that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their large loans with each other, so each get a representative sample in their loan portfolios. A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and instead usually provides small and more predictable losses. Smaller and more predictable losses are favored by many management teams because of the general perception that companies with "smoother" or more steady earnings are awarded a higher stock price relative to their earnings (benefiting management who is often paid primarily by stock). Critics, such as Warren Buffett however, say that many times this practice is irrational.If the bank could still get a representative sample by not syndicating, and if syndication would reduce their profit margins, then over the long term a bank should make more money by not syndicating. This same dynamic plays out in the investment banking and insurance fields, where syndication also takes place. To avoid that the borrower has to deal with all syndicate ban ks individually, one of the syndicate banks usually acts as an Agent for all syndicate members and acts as the focal point between them and the borrower. Page 17
    • Loan Syndication Advantages/Benefits of Syndicated Loans In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include: Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.  Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and prepayment rights without penalty.  Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.  Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.  Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit." Benefits to the borrower  Raising a loan which would exceed the capacity of a single bank.  Cutting down on management capacity since the borrower communicates only with the arranger/agent.  Broadening the financing base through the participation of other banks.  Typically less costly than numerous lines through multiple institutions.  It helps to enhance broader financial relationships.  Deals with a single bank.  Quicker and simpler than other ways of raising capital. E.g. Issue of equity or bonds. Page 18
    • Loan Syndication Benefits to the investor  Establishing direct relationships with new customers.  Enables much broader risk diversification without significant additional marketing efforts.  Due to uniform documentation there is a better chance for a subsequent placement on the secondary market.  Contract documents and information provided at no expense. Benefits to the lead banks  Fund arrangement and other fees can be earned without committing capital.  Enhancement of bank‘s reputation.  Enhancement of bank‘s relationship with the client. Benefits to the participating banks  Access to lending opportunities with low marketing/ processing costs.  It triggers more opportunities to participate in future syndications as network of the banks establishes a level of comfort with each other.  In case the borrower runs into difficulties, participant banks have equal treatment. Page 19
    • Loan Syndication Features of syndicated loans The syndicated loan is a financing method evolved from bilateral loan. Under the arrangement of syndicated loan, one bank or several banks (as the arrangers) organize other banks to grant loans to the same borrower under one loan agreement according to agreed terms. Syndicated loans have the following features:  Huge amount and long term loans.  Less pressure on banks and diversified risk.  As for the borrower, syndicated loans provide large amounts of loans with longer term and easy operation management (only need to contact with the agent bank).  Fewer restriction on the use of proceeds (compared with government loans and export credit)  Easier management (Compared with loans borrowed separately from different banks)  Syndicated loans can be structured to incorporate various options. As in the case of FRS, a drop lock feature converts the floating rate loan into a fixed rate loan if the benchmark index hits a specified floor. A multi-currency option allows the borrower to switch the currency of denomination on a rollover date. Security in the form of government guarantee or mortgage on assets is required for borrowers in developing countries like India.  Syndicated loan is more suitable as compared to a simple loan from single or multiple banks.  The borrower does not have to deal with a large number of lenders.  It has permitted the issuers to achieve more market-oriented and cost-effective financing.  Loan syndications are a cost-effective method for participating institutions to diversify their banking books and to exploit any funding advantages relative to agent banks. Page 20
    • Loan Syndication  Syndicated loans have increasingly become the corporate financing choice of large- and mid-size firms. As a result, syndicated lending has become a major component of today's financial landscape.  Syndicated lending also allows banks to compete more effectively with public debt markets for corporate borrowers. To a large extent, the development of the loan syndication market has stemmed, if not reversed, the trend toward disintermediation of corporate debt by reducing the differences between intermediated and public debt markets. Page 21
    • Loan Syndication PROJECT FINANCE AND LOAN SYNDICATION Working Capital Finance Working capital finance is done in order to meet the entire range of shortterm fund requirements that arise within a corporate‘s day-to-day operational cycle. The working capital loans can help the company in financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets. The working finance products comprise a spectrum of funded and nonfunded facilities ranging from cash credit to structured loans, to meet the different demands from all segments of industry, trade and the services sector. Funded facilities include cash credit, demand loan and bill discounting. Demand loans are considered also under the FCNR (B) scheme. Non-funded instruments comprise letters of credit (inland and overseas) as well as bank guarantees (performance and financial) to cover advance payments, bid bonds etc. Project Finance In general, project finance covers Greenfield industrial projects, capacity expansion at existing manufacturing units, construction ventures or other infrastructure projects. Capital intensive business expansion and diversification as well as replacement of equipment may be financed through the project term loans.Project finance is quite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project. The loans are approved on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit standing of promoters. Page 22
    • Loan Syndication Corporate Term Loan The corporate term loans can support the company in funding ongoing business expansion, repaying high cost debt, technology up gradation, leveraging specific cash streams that accrue into the company, implementing early retirement schemes and supplementing working capital. Corporate term loans can be structured under the FCNR (B) scheme as well, with the option of switching the currency denomination at the end of interest periods. This will helps to take advantage of global interest rate trends vis-à-vis domestic rates to minimize your debt cost. The bank‘s corporate term loans are generally available for tenors from three to five years, synchronized with your specific needs. The corporate term loans carry fixed or floating rates, as befits the exact requirement of the client and the risk context. Again, these rates will be linked to the bank‘s prime lending rate. The corporate term loans can have a bullet or periodic repayment schedule, as required by the client. The repayment mode may be linked to the cash accruals of the company. The Bank‘s expert credit crew gauges the applicant‘s particular fund requirements and evaluates the company‘s credit worthiness, factoring in the cash flows generated by it. Structured Finance The structured finance involves assembling unique credit configurations to meet the complex fund requirements of large industrial and infrastructure projects. Structured finance can be a combination of funded and non-funded facilities as well as other credit enhancement tools, lease contracts for instance, to fit the multi-layer financial requirements of large and long-gestation projects. Page 23
    • Loan Syndication Channel Financing Channel financing is an innovative finance mechanism by which the bank meets the various fund necessities along the supply chain at the supplier‘s end itself, thus helping to sustain a seamless business flow along the arteries of the enterprise. Channel finance ensures the immediate realization of sales proceeds for the client‘s supplier, making it practically a cash sale. On the other hand, the corporate gets credit for a duration equaling the tenor of the loan, enabling smoother liquidity management. Page 24
    • Loan Syndication CHAPTER:3 PARTIES AND THEIR ROLES WITHIN THE SYNDICATION PROCESS BORROWER UNDER WRITER LEAD BANK/MANAGER BANK A BANK B BANK C Page 25
    • Loan Syndication The lead bank and participating banks are the main parties involved in loan syndication. In large loan amounts, sometimes there are four parties involved, other than the borrower, in the syndication process. These are arranger {lead manager/ bank}, underwriting Bank, Participating Banks and the facility manager {agent. their roles are defined as follows:1. Arranger/lead manager:- It is a bank which is mandated by the prospective borrower and is responsible for placing the syndicated loan with other banks and ensuring that the syndication is fully subscribed. This bank charges arrangement fees for undertaking the role of lead manager. Its reputation matters in the success of syndication process as the participating banks would agree or disagree based on the credibility and assessment expertise of this bank. In other words , since the appraisal of the borrower and its proposed venture is primarily carried out by this bank, onus of default is indirectly on this bank. Thus this bank carries ‗reputation risk‘ in the syndication process. 2. Underwriting bank:- Syndication is a process of arranging loans, success of which is not guaranteed. The arranger bank may underwrite to supply the entire remainder(unsubscribed) portion of the desired loan and in such a case arranger itself plays the role of ―underwriting bank‖. Alternatively a different bank may underwrite (guarantee) the loan or portion (percentage of the loan). This bank would be called the ―underwriting bank‖. It may be noted that all the syndicated loans may not have this underwriting arrangement .Risk of underwriting is obviously the ―underwriting risk‖. It means it will have to carry the credit risk of the larger portion of the loan. 3. Participating banks:- These are the banks that participate in the syndication by lending a portion of the total amount required. These banks charge participation fees. These banks carry mostly the normal credit risk i.e. risk of default by the borrower. As like any normal loan. These banks may also be led into passive approval and complacency risk. It means that these banks may not carry rigorous appraisal of the borrower and has proposed project as it is done by the lead manager and many other participating banks. It is this banker‘s trust that so many high profile banks cannot be wrong. This may be seen in the light of reputation risk of the lead manager. Page 26
    • Loan Syndication 4. Facility manager/agent:- Facility manager takes care of the administrative arrangements over the term of the loan (e.g. Disbursements, repayments and compliance). It acts for and on behalf of the banks. In many cases the arranging/underwriting bank itself may undertake this role. In larger syndications co-arranger and co-manager may be used. Page 27
    • Loan Syndication THE ROLE FOR LOAN SYNDICATION Risk Diversification;According to Hurn, 1990 and Simons 1993, the standard theory of why banks join a syndicate is risk diversification. Project finance deals are non-recourse and therefore depend on the Isolated and assigned cash flow from the project. With no recourse to project sponsors, in Case of default, the bank that spread the risk by joining many syndicates faces a lower risk Than one that finances projects individually. Winston, 1997 and Onega, 2000 argue that Diversification is important to enhance shareholder value by reducing monitoring cost and transactions costs. Bolton and Scharfstein 1996 raised the issue of how many banks should be Included in a syndicate. They developed a model of the optimal lenders and concluded that The borrower‘s incentive to default is limited under multiple lending due to the uncoordinated. Monitoring by participating banks. Their argument is based on the assumptions that all the Banks cannot renegotiate and internalize the agreement, and do effective monitoring Henceforth limits their ability to default for strategic reasons. Mobilisation of Funds;Since mid 1980s, loan syndication has been at the centre stage of financing large projects. In most cases, these projects require high credit facility18 that may not be mobilized by one bank (Peter and Frank, 2000) (see Table 1). Financing of energy, infrastructural project – bridges Roads, tunnels, railways and public services like hospitals, prisons, and universities require Several billions of dollars which may not be available in one bank. In addition, banks have Lending exposure limits to specific sectors. When the exposure limits are high, the solution is To join effort with other banks and contribute a portion of the loan as per the bank regulations. This implies that in order to project finance deals with huge amounts, banks have to either Adjust their exposure limits or join a syndicate (Christophe, 2008). As long as the project is Bankable, banks with surplus funds are always happy to join the syndicate and enjoy its Benefits. To participate in debt financing, banks employ advisors to Page 28
    • Loan Syndication ensure that all risks are Allocated and the SPV has experience to implement the project in accordance with the Provisions of the credit agreement. The main aspect of project finance is that lenders do not Have recourse to the sponsor for loan repayment, but to the SPV‘s assets and cash flow, Therefore have to ensure that the project will generate revenue to repay the loan. Risk Exposure;Risk sharing and exposure. Although the risks19 in project finance structure are transferred to Parties competent to bear them, there is uncertainty that the project may not perform According to the financing plans and the credit agreement (Hurn 1990 and Simons 1993). The Residual risk is also borne by all the participating banks. With many banks involved in the Syndicate, the risks are shared according the proportions of their contributions to the loan. In case of default, each bank bears a proportion of the risk, which is offset by returns from Successful projects. Banks are therefore cautious about the future performance of the loan Portfolios. Information Sharing;Information sharing between many participating banks reduces risk exposure. Banks are Exposed to diverse information on borrowers, different sectors and different countries. They Are best suited to handle risks related to those particular sectors and countries. A syndicate Therefore acts as a reference credit bureau (RCB) on the borrowers and other sectors. This Further reduces their risk exposure and enhances investment in projects with the highest Returns on their equity (Peter and Frank, 2000). Information exchange is paramount for the Success of a loan syndicate. However, information gaps between the members of the Syndicate, can lead to agency problems (Christophe, 2008). To the SPV, a harmonized Channel of communication reduces costs and time that would otherwise been spent Communicating to individual participating banks Page 29
    • Loan Syndication Competitive Pricing;Competitive pricing and more flexible funding structure benefits borrowers and the final Consumers of the output or service produced by the project. In cases where the process of Loan syndication is through competitive bidding, banks that offer the best terms of the loan Are awarded the tender (Christophe, 2008). This eases the repayment schedule of the Borrower in terms of reduction of interest rates, reduces cover ratios, and lessens loan tenure. As a consequence, it increases the returns to equity and subordinated loans and leads to Smooth implementation of the project. Although Stefano (2008) argues that competition in The sector has been stiff and differences in prices are minimal, it is important to note that Stiffer competition results in normal prices and maximizes consumer welfare. In case of Power projects where the tariff is a function of debt service among others, any reduction in Interest rate benefits the power consumer. Reduction in Marketing Costs;To the participating banks, syndication provides them with lending opportunities that have Low marketing costs and chances to participate in future group financing. In developing Countries, commercial banks may not be exposed and experienced to loan syndication, they Are normally assisted by catalyst banks (CB) or multilateral agencies21 to access the Syndicated loan market (Since, 1996). Many energy and infrastructure projects which require High capital have been supported through the assistance of International Finance Cooperation22 (IFC) as a lead arranger. This provides comfort and additional security to Commercial banks to participate in debt financing. . Page 30
    • Loan Syndication CHAPTER:4 TYPES OF FACILITY COMMONLY SYNDICATED Two types of loan facility are commonly syndicated: term loan facilities and revolving loan facilities. Term Loan Facility;Under a term loan facility the lenders provide a specified capital sum over a set period of time, known as the "term". Typically, the borrower is allowed a short period after executing the loan (the "availability" or "commitment" period), during which time it can draw loans up to a specified maximum facility limit. Repayment may be in instalments (in which case the facility is commonly described as amortising") or there may be one payment at the end of the facility (in which case the " facility is commonly described as having "bullet" repayment terms). Once a term loan has been repaid by the borrower, it cannot be re-drawn. 2)Revolving Loan Facility:A revolving loan facility provides a borrower with a maximum aggregate amount of capital, available over a specified period of time However, unlike a term loan, the revolving loan facility allows the borrower to drawdown, repay and re-draw loans advanced to it of the available capital during the term of the facility. Each loan is borrowed for a set period of time, usually one, three or six months, after which time it is technically repayable. Repayment of a revolving loan is achieved either by scheduled reductions in the total amount of the facility over time, or by all outstanding loans being repaid on the date of termination. A revolving loan made to refinance another revolving loan which matures on the same date as the drawing of the second revolving loan is known as a "rollover loan", if made in the same currency and drawn by the same borrower as the first revolving loan. conditions to be satisfied for drawing a rollover loan are typically less onerous than for other loans. A revolving loan facility is a particularly flexible financing tool as it may be drawn by a borrower by way of straightforward loans, Page 31
    • Loan Syndication but it is also possible to incorporate different types of financial accommodation within it - for example, it is possible to incorporate a letter of credit facility, swingline facility or overdraft facility within the terms of a revolving credit facility. This is often achieved by creating a sublimit within the overall revolving facility, allowing a certain amount of the lenders' commitment to be drawn in the form of these different facilities. 3)General:Syndicated loan agreements may contain only a term or revolving facility or they can contain a combination of both or several of each type (for example, multiple term loans in different currencies and with different maturity profiles are not uncommon). There can be one borrower or a group of borrowers with provision allowing for the accession of new borrowers under certain circumstances from time to time. The facility may include a guarantor or guarantors and again provisions may be incorporated allowing for additional guarantors to accede to the agreement. . Page 32
    • Loan Syndication DOCUMENTATION FOR A SYNDICATED LOAN 1) Mandate Letter:The borrower appoints the Arranger via a Mandate Letter sometimes also called a Commitment Letter). The content of the Mandate Letter Varies according to whether the Arranger is mandated to use its "best efforts" to arrange the required facility or if the Arranger is agreeing to "underwrite" the required facility. The provisions commonly covered in a Mandate Letter include: (i) An agreement to "underwrite" or use "best efforts to arrange"; (ii) Titles of the arrangers, commitment amounts, exclusivity provisions; (iii) Conditions to lenders' obligations; (iv) Syndication issues (including preparation of an information memorandum, presentations to potential lenders, clear market provisions, market flex provisions and syndication strategy); (v) costs cover and indemnity clauses. 2)Term Sheet:- The Mandate Letter will usually be signed with a Term Sheet attached to it. The Term Sheet is used to set out the terms of the proposed financing prior to full documentation. It sets out the parties involved, their expected roles and many key commercial terms (for example, the type of facilities, the facility amounts, the pricing, the term of the loan and the covenant package that will be put in place). 3)Information Memorandum;Typically prepared by both the Arranger and the borrower and sent out by the Arranger to potential syndicate members. The Arranger assists the borrower in writing the information memorandum on the basis of information provided by the borrower during the due diligence process. It contains a commercial description of the borrower's business, management and accounts, as well as the details of the proposed loan facilities being given. It is not a public document and all potential lenders that wish to see it usually sign a Confidentiality undertaking. Page 33
    • Loan Syndication Syndicated Loan Agreement:The Loan Agreement sets out the detailed terms and conditions on which the Facility is made available to the borrower. 4)Fee Letters:In addition to paying interest on the Loan and any related bank expenses, the borrower must pay fees to those banks in the syndicate who have performed additional work or taken on greater responsibility in the loan process, primarily the Arranger, the Agent and the Security Trustee. Details of these fees are usually put in separate side letters to ensure confidentiality. The Loan Agreement should refer to the Fee Letters and when such fees are payable to ensure that any non-payment by the borrower carries the remedies of default set out in the Loan Agreement. 5)TIMING;Whilst the principal documents required for the provision of a syndicated loan are the same, the timing of producing such documentation often depends on whether or not the loan is being underwritten. Page 34
    • Loan Syndication Timetable of a Syndicated Loan - not underwritten Mandate from Borrower to Arranger Term Sheet Mandate Letter Syndicati on Signing/Drawd own Invitation Information Memorandum Draft Facility Agreement Allocations of Facility Agreement Fee Letters Conditions Precedent Participations Page 35
    • Loan Syndication Timetable of a Syndicated Loan – underwritten Mandate from Borrower to Arranger Term Sheet Mandate Letter Signing/Drawdo wn Facility Agreement (signed by Arrangers only) Fee Letters Conditions Precedent Syndication Invitation Information Memorandum Allocations of Participations Global Transfer Certificate/ Syndication Agreement Page 36
    • Loan Syndication SYNDICATION LOAN TRANSFERS Why sell a participation in a syndicated loan? A lender under a syndicated loan may decide to sell its commitment in a facility for one or more of the following reasons. 1)Realising Capital:if the loan is a long-term facility, a lender may need to sell its share of the commitment to realise capital or take advantage of new lending opportunities; 2)Risk/Portfolio Management;a lender may consider that its loan portfolio is weighted with too much emphasis on a particular type of borrower or Loan or may wish to alter the yield dynamics of its loan portfolio. By selling its Commitment in this loan, it may lend elsewhere, thus diversifying its portfolio. 3)Regulatory Capital Requirements:a bank's ability to lend is subject to both internal and external requirements to retain a certain percentage of its capital as cover for its existing loan obligations. These are known as "Regulatory Capital Requirements". 4)Crystallise a loss:The lender might decide to sell its commitment if the borrower runs into difficulties - specialists dealing in distressed debts provide a market for such loans. However, before the lender can go ahead and transfer its participation in a syndicated Loan, it must consider the implications of the methods of transfer available to it under the Syndicated Loan Agreement. Page 37
    • Loan Syndication 5)Forms of Transfer;The most common forms of transfer to enable a lender to sell its loan commitment are: (i) Novation (the most common legal mechanic used in transfer certificates Scheduled to loan agreements); (ii) Legal assignment; (iii) Equitable assignment; (iv) Funded participation; and (v) Risk participation. Methods (i) and (ii) result in the lender disposing of its loan commitment with the new lender assuming a direct contractual relationship with the borrower, whilst methods (iii) to (v) result in the lender retaining a contractual relationship with the borrower Each of these methods is now examined in more detail. Novation:Novation is the only way in which a lender can effectively 'transfer' all its rights and obligations under the Loan Agreement. The process of transfer effectively cancels the existing lender's obligations and rights under the loan, while the new lender assumes identical new rights and obligations in their place. Therefore the contractual relationship between the transferring lender and the parties to the loan agreement cease and the new lender enters into a direct relationship with the borrower, the agent and the other lenders. At the time the new lender becomes a party to the Loan Agreement the loan could be fully drawn, particularly if it is a term loan facility. However, particularly in the case of a revolving credit facility the new lender could be assuming obligations to advance monies to the borrower. The borrower has to be a party to the novation process. The documentation. Page 38
    • Loan Syndication required to effect a novation of a participation in a syndicated loan depends on the provisions in the Loan Agreement. However most Loan Agreements (including the LMA recommended form) have a transfer certificate attached as a schedule that operates by way of novation. There is also a provision in the Loan Agreement where all parties (including the borrower) agree that provided the other conditions to any transfer set out in the Loan Agreement are complied with they consent to the novation effected by the execution of the transfer certificate. The Agent, the new lender and the existing lender are the only parties usually required to execute the transfer certificate. Legal Assignment:Assignment involves the transfer of rights, but not obligations. For a legal assignment, s.136 of the Law of Property Act 1925 provides that the assignment must be: 1) Absolute (i.e. the whole of the debt outstanding to the existing lender); 2) in writing and signed by the existing lender; and 3) Notified in writing to the borrower. In the context of the syndicated loan, a legal assignment will transfer all of the existing lender's rights under the Loan Agreement (including the right to sue the borrower and the right to discharge the assigned debt) to the new lender. The obligation of the existing lender to provide funds to the borrower cannot be transferred by legal assignment and thus remains with the existing lender. The new lender pays the existing lender any funds due under the loan and the existing lender sends those funds on to the Agent, who then passes such funds on to the borrower. Equitable Assignment:As mentioned above, an equitable assignment is created when one or more of the provisions of section 136 of the Law of Property Act 1925 is not met, provided the intention to assign is present Between the parties In contrast to a legal assignment, the new lender, as the equitable assignee, Page 39
    • Loan Syndication must join the existing lender, as assignor, in any action on the debt. The most significant difference between a legal and equitable assignment arises if the borrower is not notified of the assignment. If the borrower is not notified of the assignment, the new lender will be subject to all equities (for example mutual rights of set-off) which arise between the existing lender and the borrower, even after the loan has been assigned. Funded participation:Under a funded participation the existing lender and the participant enter into a contract providing that in return for the participant paying the existing lender an amount equal to all or part of the principal amount of the Loan made by the existing lender to the borrower ("the deposit"), the existing lender agrees to pay to the participant all or the relevant share of principal and interest received by the existing lender from the borrower in respect of that amount. A funded participation agreement is made between the existing lender and the participant. This creates new contractual rights between the existing lender and the participant which mirror existing contractual rights between the existing lender and the borrower. However this is not an assignment of those existing rights and the existing lender remains in a direct contractual relationship with the borrower. In a funded participation, the participant agrees that its deposit will be serviced (in terms of payment of interest) and repaid only when the borrower services and repays the loan from the existing lender. The participant has effectively taken on the risk of the first loan. The funded participation agreement must ensure that the existing bank is put in funds by the participant in time to meet the borrower's demands for drawdown in order to remove the risk. The existing lender remains liable under the Syndicated Loan Agreement. Risk Participation;Risk participation is a form of participation which acts like a guarantee. The risk participant will not immediately place any money with the existing lender, but will agree, for a fee, to put the existing lender in funds in certain circumstances (typically on any payment default by the borrower). Risk participation may be provided by a new lender as an interim measure before it takes full transfer of a loan. No borrower consent is required for either a Funded Partic impaction or a Risk Page 40
    • Loan Syndication Participation, so this process can be confidential. There is no direct contract between the new lender and the borrower but the participant usually obtains rights of subrogation, therefore if the participant has to pay after the borrower defaults, the participant gains the right to step into the existing lender's shoes and pursue all remedies of the existing lender against the borrower. . . . Page 41
    • Loan Syndication MEASURES TO ENSURE SUCCESSFUL LOAN SYNDICATION Default and Remedy Clause;The credit agreement clearly specifies the remedies in case of default. Default arises from Non-payment of the loan, downslide in financial ratios, bankruptcy or Insolvency, noncompliance With covenants, warranties and non-payment by the sponsor of any other loan When due. However, all events of default must pass the materiality test in order to be Considered as EoD. The remedies include loan cancellation, right to accelerate the loan Limitation of distributions to sponsors and step-in-rights23 (Stefano, 2008). All participating. Banks have the same rights to enforce these provisions, however some credit agreements Provide right of enforcement to some banks. The Sharing Clause;A sharing clause is intended to balance the interests of participating banks. It is designed to share any proceeds from the SPV as a repayment of the loan or any other payment that results from default and all costs related to the syndicate in accordance with their proportional loan. Contributions. The clause is aimed at protecting the minority banks from the majority. Participating ones. This ensures fair distribution of benefits to all participating banks and leads to successful syndication. Loan Syndication Democracy;The credit agreement contains provisions for decision making by the participating banks. In this regard, the voting clauses are included to ensure that the syndicate obtains majority. Consensus before making a decision. Voting is according to bank participation and a majority vote would usually be obtained through a 50% simple majority or a 66% absolute majority. rule, and whichever the case, this must be expressly provided in the syndication agreement. This power to exercise the syndicate voting rights must be exercised in the interest of the syndicate, but not to the detriment of the voter. If adequately addressed in the credit decision making interests of the parties to the credit agreement. In case of major decision. Like calling up a loan, step-in-right enforcement; syndicate democracy prevails if the events Of default pass the materiality test. Page 42
    • Loan Syndication Negotiation;This should normally be at the centre stage if loan syndication is to succeed in performing its role. All provisions of the credit agreement and other financing documents are subject to a comprehensive negotiation. In this regard, participating banks appoint advisors from different disciplines to negotiate and ensure that the terms of the agreements are favourable. If the bank feels that the terms are not in its favour, it has the liberty to leave the syndicate. Appending the signature on the loan syndication agreement implies that all participating banks agree to the terms of the agreement and will comply accordingly. . Page 43
    • Loan Syndication Loan Syndicating Financial Institutions Union Bank of India, has entered into a Memorandum of Understanding [MOU] with IDFC, one of the leading Infrastructure Financing Institution and Bank of India, another leading Public Sector Bank for jointly Syndicating & Financing the large Infrastructure & core industrial projects, which are coming up in the country. This is the first time when a premier Infrastructure financing Institution and two large Public Sector Banks are coming together to share the skill sets developed over a period of time, to Syndicate/Underwrite the Debt and extend total financial solution for large projects coming up in the Public Private Partnership [PPP] domain as well as in the Private Sector. IDFC (Industrial Development Financial Corporation) is a premier Infrastructure Financing Institution having vast experience in financing mega projects over a broad spectrum of industries. Union Bank of India & Bank of India are amongst the large Public Sector Banks having vast experience in providing Working Capital besides extending project finance. This arrangement will facilitate joint identification, marketing and appraisal of Syndicated Loans with underwriting arrangements. It is envisaged that the promoters in the PPP would largely benefit from this Tie-up, which would provide a total financial solution, Term Loan for the project as well as Working Capital. In fact, the benefits of Syndication would accrue to all the concerned parties especially the borrower: - Single point contact with the Lead Arranger. - Submission of papers only to the Lead Arranger. - Joint Appraisal leading to quick decisions. - Possibility of securing competitive terms. Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the. transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial Page 44
    • Loan Syndication products and services to fulfill the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development.  The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country.  These financial institutions can be broadly categorized into All India institutions and State level institutions, depending upon the geographical coverage of their operations.  At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions.  Other Financial Institutions Include: - NABARD (National Bank for Agriculture and Rural Development) EXIM (Export Import Bank of India) IFCI (Industrial Financial Corporation of India). Page 45
    • Loan Syndication LOAN DEPOT The Loan Depot Inc was incorporated in Canada in October 1998 by a group of Finance and Real Estate professionals with experience in the Domestic and International Finance Markets and International Real Estate Hedge Markets for over 10 years. The main businesses of The Loan Depot are Domestic and International Finance, Loan Syndication from International Funding Agencies and Major World Banks, Project Financing, Real Estate Acquisition syndication and hedging. In 2000 the Corporation moved its head quarters from Ontario, Canada to Chattanooga, TN. In 2001, the company expanded its operations to include conventional and government guaranteed lending products. The Surviving Company is now know as "THE LOAN DEPOT, LLC", and is committed to provide the highest level of service to our customers, borrowers and brokers. Their Mission at The Loan Depot is to anticipate and successfully meet the changing needs of our client and match them with the requirements of the capital market. The standard of excellence is upheld through our innovative thinking, our unique competitive advantage, and most importantly, our dedication to our client. Their goal is to provide you attractive financing options that will best serve your individual financing needs. They have successfully laid a firm foundation for financing a broad range of loans. They look forward to working with people and helping them in their business. Page 46
    • Loan Syndication They pride themselves in being one of the most innovative, diversified group of financial service companies in the United States and Canada and plan on staying that way. Loan Depot offers a number of custom services to helps to achieve financial goals. Mortgages Loan Depot offers a wide variety of options for all mortgage needs offer the best rates and with over 150 products we specialize in self employed and not so perfect credit situations(i.e.: bankruptcy, divorce). Their programs include 100% financing for purchase or re-finance to consolidate debt or for investment purposes. Auto Loans Offer a variety of finance plans for the purchase or re-finance of new and pre-owned vehicles. Loans Loan Depot is a full service loan placement firm. They offer secured and unsecured loans available to people in every credit situation. Their rates are competitive and all situations are welcome. Recreational Vehicles Loan Depot offers financing on all recreational vehicles they offer competive rates on boats, R.Vs and ATVs etc.Their programs allows to finance new or used purchase or to-re-finance the existing vehicle at a lower rate or better terms. Credit Cards Loan Depot offers a secure visa to help establish or re-establish credit with all the convenience and services one can access with a visa card. Page 47
    • Loan Syndication The Syndicated Loan Market  The syndicated loan market, a hybrid of the commercial banking and investment banking worlds, is globally one of the largest and most flexible sources of capital. Syndicated loans have become an important corporate financing technique, particularly for large firms and increasingly for midsized firms. The rapid development of the syndicated corporate loan market took place in the 1990s exploring the historical forces that led to the development of the contemporary U.S. syndicated loan market, which is effectively a hybrid of the investment banking and commercial banking worlds. Syndicated lending aims to increase the risks and benefits involved in taking part in the syndicated loan market.  There has been a notable change in large corporate lending over the past decade, as the old bilateral bank-client lending relationships have been replaced by a world that is much more transactionoriented and market-oriented. The Canadian syndicated loan market has been strongly influenced by its U.S. counterpart, but it is not yet at the same level of development. It also explores potential risk issues for the new corporate loan market, including implications for the distribution of credit risk in the system, risks in the underwriting process, the monitoring function, and the potential for risk arising from asymmetric information.  The development of the market for syndicated loans, and has shown how this type of lending, which started essentially as a sovereign business in the 1970s, evolved over the 1990s to become one of the main sources of funding for corporate borrowers. The syndicated loan market has advantages for junior and senior lenders. It provides an opportunity to senior banks to earn fees from their expertise in risk origination and manage their balance sheet exposures. Throughout history, innovation has driven the development of the financial markets, and over the last 20 years, the syndicated loan market has provided particularly fertile ground for financial innovation. From a relatively esoteric field involving commercial banks syndicating lines of credit, financial innovations have helped it develop into a broad, dynamic market encompassing both an efficient primary market that originates syndicated credits and a liquid. Page 48
    • Loan Syndication Secondary trading market where prices adjust to reflect credit quality and market conditions.  The development of an efficient and liquid syndicated loan market in the U.S. has greatly impacted its capital markets. The syndicated loan market bridges the private and public fixed-income markets and provides borrowers with an alternative to high yield bonds and illiquid bilateral commercial bank loans. It provides much-needed credit to lower-rated companies and has strengthened the bankruptcy process in the U.S. through its facilitation of DIP (debtor-in-possession) lending.  Today‘s syndicated loan market benefits banks also; in times of adversity, they can sell portions of the syndicated credits into a relatively liquid secondary market and actively manage the risk in their loan portfolios. This allows banks to avoid unnecessary lending restrictions when the economy contracts and thus the impact of an inefficient ―credit crunch.‖  The development of the secondary market for syndicated loans has led to the creation of a new asset class with greater return per unit of risk than many other fixed-income assets and low correlations with most other classes of assets. The leveraged portion of the market, the part of the market where most innovation has occurred, receives special attention. Syndicated loans are an integral part of capital raising for these markets.  This analysis provides a primer to investors and other parties interested in a market that has, without great fanfare, been one of the most rapidly growing and innovating sections of the U.S. capital market in the past 20 years. It explores issues related to the main features of the primary market using the most recent data available and details the characteristics of the secondary market. Investment returns, as well as the risks of the asset class, particularly credit risk, receive special attention.  The syndicated loans market has grown rapidly in recent years, driven primarily by an increase in corporate takeovers, private equity transactions and infrastructure deals. Strong liquidity means there is plenty of cash to invest, and banks are willing lenders. Page 49
    • Loan Syndication  The leveraged loan market remains small compared with the investment-grade market and bankers said the investors and their attitudes were markedly different. The volumes in the Indian offshore syndicated loan market have grown enough in the past few years. How the market works; Major corporate clients will almost automatically consider a syndicated loan for sums above a few hundred million euros. Syndication splits the lending risk between large number of investors, at price (margin and fees) determined by the market. It is an efficient way of raising funds quickly and on best terms. For borrowers the advantage is that they can raise larger amounts and expand their group of bankers whilst at the Same time only having to sign a single contract  For lenders, syndication allows a diversification of the lending portfolio from both a geographical and sectorial point of view. In addition, lenders get the benefit of the facility agent‘s expertise in management of drawdowns and of other events in the lifetime of the loan after the facility agreement has been signed.  The syndicated loan market was originally developed in the USA in the 1970‘s as a means of financing leveraged buy(LBOs). It has since gone on to become the leading vector all sorts of financing. In Europe the market expanded rapidly the UK and then on the continent, particularly in France. The market‘s rapid growth can be seen from the fact that in 1993 the total volume of the market worldwide was USD 1.4. trillion, whereas in 2005 it exceeded USD 3 trillion)  The rapid growth in syndicated facilities is certainly due in to the trend over the past fifteen years, across all sectors of economy, towards industry consolidation. for a borrower, the choice between a syndicated loan and negotiable debt instruments often comes down in favour of the first. loans are the only means of raising, rapidly and with few formalities, sums greater than are available on other markets, like bonds and equities, or through private placements. Page 50
    • Loan Syndication These loans may be used to cover a whole ranges of uses by the borrower: refinancing, undrawn lines of credit supporting commercial paper and treasury note programmes, acquisitions, LBO financing, project and other structured financing. The arrangement commission paid by the borrower is determined by the complexity of the deal: the most profitable deals for banks are leveraged acquisitions. By taking full advantage of the syndicated loan market, some banks have managed to make headway in increasing their returns and still offering the borrowers some of the finest terms and conditions ever seen. Features of the syndicated loan market such as transaction size, availability, speed of reaction and flexibility ensure that it continues to be one of the primary sources for issuers looking to raise capital from the markets. It will examine the needs of both borrowers and lenders involved in the origination, structuring, distribution and management of syndicated loans and link the process of executing a successful deal to the optimal design of a syndications unit. Banks have benefited from this broadening of the syndicated loan market in several ways. They are a cost-effective method for participating institutions to diversify and exploit any funding advantages relative to agent banks. To a large extent, the development of loan syndication market has stemmed, if not reversed, the trend toward disintermediation of corporate debt by reducing the differences between intermediated and public debt markets. Page 51
    • Loan Syndication Overview of ICICI Bank ICICI Bank is an Indian multinational bank and financial services company headquartered in Mumbai. Based on 2013 information, it is the second largest bank in India by assets and third largest by market capitalization. It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank has a network of 3,350 branches and 10,486 ATM's in India, and has a presence in 19 countries. ICICI Bank is one of the Big Four banks of India, along with State Bank Of India, Punjab National Bank and Canara Bank. The bank has subsidiaries in the United Kingdom, Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre; and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The company's UK subsidiary has established branches in Belgium and Germany. Page 52
    • Loan Syndication History of icici Bank ICICI Bank was established by the Industrial Credit and Investment Corporation of India, an Indian financial institution, as a wholly owned subsidiary in 1954. The parent company was formed in 1955 as a jointventure of the World Bank, India's public-sector banks and public-sector insurance companies to provide project financing to Indian industry.[ The bank was initially known as the Industrial Credit and Investment Corporation of India Bank, before it changed its name to the abbreviated ICICI Bank. The parent company was later merged with the bank. ICICI Bank launched internet banking operations in 1998. ICICI's shareholding in ICICI Bank was reduced to 46 percent, through a public offering of shares in India in 1998, followed by an equity offering in the form of American Depositary Receipts on the NYSE in 2000. ICICI Bank acquired the Bank of Madura Limited in an all-stock deal in 2001 and sold additional stakes to institutional investors during 2001-02. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group, offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE In 2000, ICICI Bank became the first Indian bank to list on the New York Stock Exchange with its five million American depository shares issue generating a demand book 13 times the offer size. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by Page 53
    • Loan Syndication shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002 and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. In 2008, following the 2008 financial crisis, customers rushed to ICICI ATMs and branches in some locations due to rumours of adverse financial position of ICICI Bank. The Reserve Bank of India issued a clarification on the financial strength of ICICI Bank to dispel the rumours.. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to Page 54
    • Loan Syndication ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmadabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity. Page 55
    • Loan Syndication ICICI SYNDICATION ICICI Bank arranges foreign currency loans for corporates. Foreign Currency credit is arranged through commercial loans, syndicated loans, bonds and floating rate notes, lines of credit from foreign banks and financial institutions, and loans from export credit agencies Backed by a vast network of 8 overseas offices and over 700 correspondent banks, ICICI Bank has an edge over others in its ability to arrange cross-border financing. With an established presence in all the major global financial centers and long experience in structured financing, ICICI Bank is strongly positioned to offer fi nancial solutions that suit the specific requirements of the client. They have a primary focus on Indian clients and can provide with insightful credit information and help to extract more value from the transactions. They are very active in granting and arranging various forms of External Commercial Borrowing (ECB) facilities for the Indian corporates. Syndicationdeskaticicibank ICICI Bank has set up a dedicated syndication desk in its International Banking Group in India to pursue syndication business. The Syndication Group in India works in tandem with the Corporate Banking Relationship Managers to lease with the Indian corporates for arranging ECBs for them. ICICI Bank has also formed syndication teams in various overseas offices (USA, UK, Singapore and Bahrain). These teams consist of specialists who are veterans in international syndicated loans market and have strong understanding of the Indian ECB market. International presence has not only increased ICICI Bank's reach to the international investor Page 56
    • Loan Syndication community but also significantly enhanced the underwriting capability. Service Offering       Providing foreign currency loans to the Indian corporates. Arranging / underwriting External Commercial Borrowings for the Indian corporates by way of foreign currency loans, FRNs, bonds, etc. Participating in the international loan syndications. Granting loans backed by Export Credit Agencies. Consultancy services on the cross -border funding through variety of sources. Arranging credit facilities / financial packag es for overseas projects of the Indian Companies. ICICI Bank services the financial sector for the entire set of banking requirements and provides a complete range of solutions. The Financial Institutions and Syndication Group (FISG) are responsible for ICICI Bank's relationship with the financial sector. Under this umbrella, the Bank caters exclusively to the needs of Domestic Financial Institutions. • Banks. • Mutual Funds. • Insurance Companies. • Fund Accounting. The FISG has built strong relationships through various interactive measures, like seminars, training programs, sharing of market information and views with clients, organizing the Bank CEOs' Forum, etc . Page 57
    • Loan Syndication The services provided to the cl ients are as follows:Transaction Banking The Bank delivers world class banking services to financial sector clients. Their current roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed for Yourconvenience. Their comprehensive collection and payment services span India's largest CMS network of over 4,500 branches. They provide correspondent banking tie -ups with foreign banks to assist them in their India -related businesses. Loan Syndication The FISG is responsible for syndication of loans to corporate clients. They ensure the participation of banks and financial institution for the syndication of loans. Some of the products syndicated are 1. 2. 3. 4. Project Finance Corporate Term Loans Working Capital Loans Acquisition Finance, etc. Sell Down:- ICICI Bank is a market leader in the securitization and asset sell -down market. From its portfolio, the FISG offers different products to its clients in this segment. The products are: • Asset-Backed Securities (ABS). • Mortgage-Backed Securities (MBS). • Corporate Loan Sell-down. • Direct Loan Assignment. Resources:- The bank also raises resources from clients, for internal use by issuing a vari ety of products, which run from certificate of deposit(CD‘s) to term deposits. Page 58
    • Loan Syndication SYNDICATION ADVISORY AND OTHER SERVICES  IDBI has set up a separate department called 'Sourcing and Syndication Department' (SSD) to take up various investment banking services so as to provide all types of financial and advisory services to the companies for their project and expansion activities, raising funds from domestic and international market, growth plans by way of mergers & acquisitions, carbon credit activities etc. Important services offered by SSD are as under:  Debt syndication - Syndication of long term loan (Rupee loans as well as Foreign Currency loans), working capital loans, and nonfund based limits etc. Debt Syndication can be in form of structured loans, bonds/debentures etc.  Equity syndication - Syndication of equity funds by way of strategic investment, private placement including with private equity funds, preferential allotment, Qualified Institutional Placement (QIP) etc.  Public Issues / Right Issues - Managing Public Issues/Right Issues through Ibis‘s subsidiary viz., IDBI Capital Market Services Ltd. (ICMS).  Merchant appraisals - Appraisal of projects including new projects, expansion, modernization, amalgamation/merger schemes which aids the companies to take a decision for investment. Merchant appraisals are also carried out for various projects in infrastructure sector for qualifying in the bidding process.  Arranging funding for overseas acquisitions - Several corporate aspire to acquire units abroad to achieve their global business plans and require funds to acquire the stake in the units to be acquired. SSD arranges for such funds through its strong relationship with all banks and financial institutions.  Acting as an Initial Public Offer (IPO) monitoring agency - As per guidelines of Securities and Exchange Bureau of India (SEBI), any IPO of the size more than Rs. 500 crore requires a financial institution to certify the end use of funds on semi annual basis. Page 59
    • Loan Syndication  Offering advisory and other services for Mergers/Acquisitions Advising companies in their plans of mergers/acquisitions including identifying target companies, undertaking financial due diligence, working out the financial projections, structuring of purchase consideration etc.  Bank syndicates control the risk sector by downsizing the industry when market demand fails to meet the expectations  The market for syndicated loans is huge. The standard forces for why banks join forces in a syndicate are risk diversification. The banks in the syndicate share the risk of large indivisible investment projects. Syndicates may also arise because additional syndicate members provide informative opinions of investment projects. The motive for syndication is to control the risk of the loan portfolio, rather than sharing the risk.  Syndicated loan services include structuring, arranging and underwriting of loan facilities. The syndicated market is one of the largest and most flexible sources of capital in the international finance marketplace. Page 60
    • Loan Syndication Loan Syndication Fees & Charges Loan processing fee:a lum-sum non refunable amount to be paid to the lead manager for processing the loan. Arranger‘s fee:Fee to be paid for arranging the fund based on syndicated amount before signing the aggrement to the arranger bank or group of bank for arranging the transaction. Agency‘s fee:Fee payble to the agent bank for persevering the all security, document and for rendering administrative and monitoring activity. ParticipationFee:Fee to b paid on syndicated loan amount to the participating bank based on participation amount. Page 61
    • Loan Syndication ManagementFee(Annual): Fee on outstanding amount at each year end during loan period to be shared by all participating bank. Page 62
    • Loan Syndication Corporate Banking At ICICI Bank, we offer corporates a wide range of products and services, the technologies to leverage them anytime, anywhere and the expertise to customize them to client-specific requirements. From cash management to corporate finance, from forex to acquisition financing, we provide you with end-to-end services for all your banking needs. The result is an overall financial solution for your company that helps you accomplish your objectives. ICICI Bank can guide you through the universe of strategic alternatives from identifying potential merger or acquisition targets to realigning your business' capital structure. ICICI Bank has been the foremost arrangers of acquisition finance for cross border transactions and is the preferred financer for acquisitions by Indian companies in overseas markets. The Bank has also developed Forex risk hedging products for clients after comprehensive research of the risks a corporate body is exposed to, e.g., Interest Rate, Forex, Commodity, Credit Risk, etc. We offer you global services through our correspondent banking relationship with 950 foreign banks and maintain a NOSTRO account in 19 currencies to service you better and have strong ties with our neighbouring countries ICICI Bank is the leading collecting bankers to Public & Private Placement/ Mutual Funds/ Capital Gains Bonds issues. Besides, we have products specially designed for the financial intermediaries to meet their unique requirements. We support your international business by meeting working capital requirements of export and import financing. We also have a host of nonfunded services for our clients. Whatever your industry, size or financial requirements, ICICI Bank has the expertise and the solutions to partner you all the way. Transaction Banking;The Bank delivers world class banking services to financial sector clients. Our current roaming accounts empower you with 'Anytime, Anywhere Banking'. They are designed for your convenience. Our comprehensive collection and payment services span India's largest CMS network of over 4,500 branches. We provide correspondent banking tie-ups with foreign banks to assist them in their India-related businesses. Page 63
    • Loan Syndication Branches of ICICI Bank icici Bank Ltd has branches in 33 states and Union Territories in India. ANDHRA PRADESH ARUNACHAL PRADESH ASSAM BIHAR CHANDIGARH CHHATTISGARH DADRA and NAGAR HAVELI DAMAN and DIU DELHI GOA GUJARAT HARYANA HIMACHAL PRADESH JAMMU KASHMIR KARNATAKA KERALA MADHYA PRADESH MAHARASHTRA MANIPUR MEGHALAYA MIZORAM NAGALAND ORISSA PONDICHERRY PUNJAB RAJASTHAN SIKKIM TAMIL NADU TRIPURA UTTAR PRADESH UTTARAKHAND WEST BENGAL and JHARKHAND Page 64
    • Loan Syndication Conclusion Banking sector has seen lot of transformation in the past post liberalization period, it has become very important for bank to give services best to their capabilities. if the customers are not satisfied with the services provided by the bank, they will transfer their account to some other bank. result is loss of revenue for the bank and the loss of goodwill. New technology needs to be introduced in the banking sector as it is utmost clear that people are not only expecting normal banking services but they want to be as their business partners and help accordingly. Therefore, the bank has give more and more services to the people in order to have increased returns from fee-based function. Professionalism is getting the key word in banking sector. People now expect the privatized banks to become more and more professional rather that of earlier years where the staff has no sympathy or understanding for the time value of the customer. People today demand more working hours, more services to be provided at no extra cost or minimum cost. this has led to more professional attitude by the banking people. Perhaps the oldest form of services sector known to human is going through a radical change not only throughout the world but also in India. The greatest beneficiary of this change is none other than the human itself. Expectations from the study are that it may contribute to the real scenario of loan syndication demand and accordingly the banks can go for new innovative schemes. It will also specify some recommendations and based on that banks can make suitable arrangements in a particular sector. Page 65
    • Loan Syndication QUESTIONNAIRE FOR BANKER A questionnaire is a device for securing answers to questions by using a form which the respondent fills in himself. Q.1) What are the fees charged by the banker for undertaking the work of loan syndication? ANS:- The fees charged by the banker for undertaking the work of loan syndication is 1% of the total loan amount. Q.2) To whom are these loans specially designed for? ANS:- It is specially designed for large and medium companies, government and municipalities and financial institutions. Q.3) What all does syndicated lending cover? ANS:- It covers short term transactions,export finance, subsidy management, capital market financing, structured financing, currency management, leasing and factoring. Q.4) Who are the main parties involved in loan syndication? ANS:- The main parties involved in loan syndication are lead bank and the participating bank. Q.5) If the business is internal are the syndicated loans beneficial? ANS:- YES, to a large extent. They have becoming a key for entering new markets. Q.6) How large is the syndicated loan market? ANS:- In the past 10 years, secondary loan trading volume has grown 1500%. In 2001,the total syndicated loan volume was $1.1 trillion, according to loan pricing corporation. Q.7) From what time has the demand for these loans start increasing? ANS:- The demand for these loans is increasing for over past fifteen years. Page 66
    • Loan Syndication WEBLIOGRAPHY www.goggle.com www.banknet.com www.icicibank.com visit at ICICI Bank Thane Page 67