Syndicate: group of people who lends money (usually more than one lender)
Let me take up an example to illustrate :
Case Statement : XYZ Corporation is planning to expand its operations in the infrastructure segment globally. XYZ corporation needs a huge investment of let’s say 300 million dollars.
Issue: No single bank or finance institution is ready to finance the project. The reason is very simple: They don’t want to risk such a huge amount of capital because if the project fails it will directly impact the revenue of the financial institution or bank.
Solution: Group of banks, insurance companies or mutual fund companies participates in the process of lending. They work together and offer a loan of 300 billion dollars to XYZ Corporation.
Syndicated Loan:
Syndicated loan is the loan offered by a group of companies/bank to a particular borrower or any big corporation. It may have fixed amount or they provide credit limit and sometimes even both.
Typically there is one company/bank which is the lead lender usually and the company/bank invites bidding from other companies/bank for the purpose of distributing the risk.
The syndicated lending is highly practiced in US and Europe by the large corporations.
There are three ways of syndication: 1) Underwritten deal: The lead lender guarantees the entire loan (including the credit limit) and syndicates it. If they fall short in subscribing the loan even with the help of other lenders usually they sell it up to investors.
This type of deal is helpful for the lead lender in view of the lucrative fee they charge the client.
2) Best Efforts Syndication: The group of lenders guarantee the amount less than or equal to the loan (excluding the credit limit). The credit amount depends on the market conditions.
This is used for risky borrowers or very complex transactions
3) Club deal: This type of loan is usually a small one typically in the range of 25-100 million. In this every lender gets a full cut of fee or nearly a full cut of the charges.
Advantages of Syndicated Loan:
· Flexibility in financing big projects
· Enhancing existing business relationships and exploring new ones
· No pressure on the sole lender
· Varying funding sources (mutual funds companies/insurance companies)
P.S. I am an engineer help me in understanding finance better by providing valuable feedback.