A loan syndication is a large business loan made by a group of lenders to a borrower, reducing default risk for each lender. It is primarily used by large corporations and involves commercial finance companies, banks, and institutional investors. There are three types of loan syndication underwriting situations: underwriting, best efforts, and club.
A loan syndication is when a group of lenders come together to make a large business loan to the borrower. For the borrower, the loan is from a lender, so a lender acts as the originator of the loan. However, behind the scenes, the loan is held by multiple lending institutions, which reduces the amount of default risk for each of the lending institutions involved in the transaction.
Primarily, a syndicated loan is used by large corporations in the United States and Europe. Corporations approach a lender and have the lender work as an agent for the corporation to help it raise the money or capital it needs for a specific business purpose. The lender responsible for arranging the large loan and acting as the liaison between the borrower and all lenders earns a fee for their services, similar to how a mortgage broker in a residential or consumer transaction receives a fee for providing matching services. of loans.
Three types of lending institutions are involved in loan syndication. These institutions include commercial finance companies, banks, and institutional investors. In addition, there are three types of loan syndication underwriting situations: underwriting, best efforts, and club.
In a syndication of underwritten loans, the lender that the borrower approaches is the institution that makes the loan. After the loan closes, the lender then syndicates or sells portions of the loan to other lenders to spread the risk of the large loan amount among multiple lenders instead of keeping the entire obligation on their own books.
Best efforts syndication occurs when the lending group originating the loan does not agree to finance the full loan amount, but instead accepts a portion of the loan amount requested by the borrower. The most common use of a best efforts syndication loan is when the borrower has poor credit or bad credit. In some situations, the deal may not close, because the borrower needs the full amount of the loan, but in other cases, the borrower takes the amount that the distribution group agrees to lend.
In a club syndication agreement, the group of lenders works together in advance to work out the details and approve the loan. In a club syndicate, all the lenders involved split the loan amount and the fees charged from the borrower equally or nearly equally. These are typically smaller loans than those involved in the underwritten syndication or best efforts syndication.
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