The Basics of Commercial Loan Syndication | Riverdale Funding

The Basics of Commercial Loan Syndication

Feb 06, 2017

 

There’s no shortage of items commercial hard money brokers should keep track of when it comes to the realm of commercial loans.  Trust us: It’s understandable that the commercial lending details you don’t experience on a daily basis may be a bit fuzzy.  Don’t worry – even for lenders, most commercial mortgages are just itemized on a balance sheet.

What happens when a commercial loan is an outlier because it’s so significantly large?

In this edition of our Broker Talk series, we’ll be diving into loan syndication.  Loan syndication is an out-of-the-ordinary process, which means many borrowers and even commercial lenders lack a comprehensive understanding of how it works.

Let’s get the ball rolling.

 

What is Commercial Loan Syndication?

The best way to understand loan syndication is to understand how syndicated loans differ from traditional commercial loans.

Traditional commercial loans or credit lines are provided by a sole lender.  In a typical example, a small business or larger company would be borrowing from a single lender to fund a project, expansion, renovation, or another large expense.

Syndicated loans are offered by a group of lenders, or a “syndicate,” which collectively provide funds for a borrower.  The nature of the loan can vary – it could be a credit line, a fixed amount of funds, or a combination of the two.  The sole factor that makes it a syndicated loan rather than a traditional commercial loan is that a group of lenders are providing the funds together.

 

Why Syndication a Loan?

Generally, loan syndication occurs on a corporate level to fund capital projects such as buyouts or mergers, which often require huge amounts of capital, far more than a company can cover through asset-based lending.  The majority of lenders aren’t even capable of lending many millions or billions of dollars, or if they are, they are unlikely to take on the high level of associated risk.

For example, on June 6, 2016, Tencent Holdings Ltd., the largest internet company in Asia, increased the size of a syndicated loan to $4.4 billion in anticipation of various company acquisitions.  A year prior, in 2015, Charter Communications made headlines as 2015’s largest loan-funded syndication with its Time Warner Cable merger – the amount was $13.8 billion.

At these levels, it’s much clearer to see how important loan syndication is for spreading out default risk across various lenders.  If a syndicate of lenders collectively fund the loan, they can still take on sizable chunks but with manageable credit exposure.

 

Who Comprises a Loan Syndicate?

Primarily, lenders are banks, such as Bank of America Merrill Lynch, JPMorgan Chase & Co., Wells Fargo, and Citibank.  Sizable international banks such as Credit Suisse, Bank of China, and Australia & New Zealand Banking Group also play roles in loan syndication.  However, funds are also frequently provided by institutional investors, including hedge funds or pension funds.

One of the syndicate’s lenders will typically take on the role of the lead bank or underwriter of the loan.  This institution is referred to as the arranger, the agent, or lead lender, and may perform administrative duties and disperse cash flow, or provide a higher proportion of the loan amount.

 

Loan Syndication in Action

There you have it – all the basics of loan syndication.  It’s an uncommon process, and understandably different from most commercial loans or commercial mortgages.  When the next major corporate acquisition or expansion makes the headlines, think about the immense capital it took to accomplish that feat.  It may not be the company’s funds, after all, and it may not be capital borrowed from a single bank.  Rather, there might just be a team of commercial lenders working and making headlines together.