Syndicated Loans

Big corporations in both the United States and in Europe constantly seek out ways to utilize financial capital that banks and other financial institutions provide. The capital is used to generate loans for borrowers. A syndicated loan is one of the ways that these corporations can go about accomplishing this. Syndicated loans work by allowing certain groups to provide loans that are managed by banks and other institutions. The managers that deal with syndicated loans are called arrangers. Arrangers have the duties of raising funds by attracting investors. Anytime capital is needed for loans the arrangers set out to gain new prospecting investors looking for alternative ways to invest.

Arrangers make their money from these types of transactions by being reimbursed for their services. Increased risk factors of the loan will require higher fees by the arrangers. Profitable loans depend on how much the borrower leverages against risk. In other words, borrowers with excellent credit ratings and excellent debt-to-income ratio produce higher profitable loans to investors. Arrangers can also generate higher profits regardless of the fees they charge. The movement of markets makes a huge impact on whether or not syndicated loans will generate profit. During harder times of the economy, it may be more difficult for borrowers to qualify for loans, even if they have excellent credit.

These types of investments are driven by debt. The only way corporations make money through syndicated loans depends on the ability for borrowers to get into more debt. This is not the case with Europe. In Europe, the corporate structure is less involved with issuing debt. In fact, private sponsors dominate the market when it comes to syndicated loans. Private sponsors also dictate the policies and standards that are associated with loan syndication. Investors should take note of these factors that differ from the United States and Europe when investing.

There are three main types of syndication loans that are found in the worldwide markets. Underwritten deals, best-efforts syndication and club deals are all syndication loans that can be found within the world markets. The big difference between the United States and Europe when it comes to syndicating loans is the approach of what type of loan syndication is being used. For example, Europe primarily uses underwritten deals while the United States often uses best-efforts. It’s extremely rare to find syndication loans that use the best-efforts model in Europe. What are other differences with these three main types of syndication loans?

Underwritten deals deal with a guarantee of commitments to the loans. These commitments are made by the arrangers of the syndicated loan. One interesting factor about underwritten deals are the fact that arrangers must soak up any difference that they are unable to completely subscribe to with the loan. Best-efforts, on the other hand, deal with approaches differently than underwritten deals. Best-efforts deal with the arrangers making a commitment that is less than the full amount of the loan. Riskier borrowers impose a certain amount of a threat to the markets. In order to minimize these risks, best-efforts were created.

The club deal model deals with higher level investors. Usually $25 to 100 million, and sometimes up to $150 million are amounts that groups invest in for borrowers. Depending on the overall goals of a corporation or a group of investors, they will pick one of these three models that will generate the highest return possible. Syndicated loans have been one of the main driving forces behind progress. Without the availability of these types of loans, economic slow downs with be eminent. The interesting differences between how the U.S. and Europe deal with syndicated loans makes an impact on investors when making a decision with which model to invest in.

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