What Is a Syndicated Loan?
Lenders Join Together
Large organizations like governments and multinational corporations occasionally need to borrow money—just like you. When they do so, they often go to banks. But borrowing for massive expenses is challenging unless several lenders join forces to provide a loan that’s large enough to meet a borrower’s need.
Syndicates help make those loans happen.
What Is a Syndicated Loan?
A syndicated loan is a loan from a group of banks to a single borrower. When an individual lender is unable or unwilling to fund a particularly large loan, borrowers can work through one or more lead banks to arrange to finance. That syndicate manager works with the borrower to arrive at interest rates, payment terms, and other details described in a term sheet.
From a borrower’s perspective, syndicated loans make it relatively easy to borrow a significant amount. The borrower can secure funding with one agreement instead of attempting to borrow from several different lenders individually.
From a lender’s perspective, syndicated loans enable financial institutions to take on as much debt as they have an appetite for—or as much as they can afford due to regulatory lending limits. Lenders can stay diversified but still participate in large, high-profile deals. What’s more, they gain access to industries or geographic markets that they don’t ordinarily work with. These loans are contractual obligations, making them similar to other senior sources of capital, and they may even be secured with collateral.
How Syndicated Loans Work
Loans come in a variety of forms, and a single loan might have several different types of debt.
Revolving debt allows borrowers to take only what they need when they need it, and come back for more later. Lenders set a maximum credit limit, and borrowers may be able to borrow and repay repeatedly (or “revolve” the debt) against a line of credit.
Term loans provide one-time financing that borrowers typically pay off with gradually with fixed payments. Some term loans feature a large balloon payment at maturity instead of amortizing payments.
Letters of credit (LOCs) are bank guarantees that provide security to somebody the borrower is working with. For example, a standby letter of credit might protect a municipality that pays millions of dollars for an infrastructure project—but the contractor fails to complete the project. The LOC would provide funds to the municipality (at the contractor’s expense), enabling them to pay other contractors or fix the problem in other ways.
Other arrangements may exist, such as delayed-draw lines, which provide approved funding that borrowers use over a period for planned expenditures.
A syndicated loan might feature several different terms. For example, a loan might have a portion of the debt due in seven years, with the remainder due after ten years. Plus, those loans might have interest rates that are fixed for the life of the loan or variable interest rates that fluctuate with an index (such as LIBOR).
Who Uses Syndicated Loans?
Syndicated loans make sense when a loan is too big for any individual lender to reasonably offer. Government bodies might borrow for massive infrastructure improvements requiring hundreds of millions of dollars. A company might borrow to purchase equipment or build sophisticated facilities for large-scale manufacturing. Businesses use these loans to buy other companies, and they also obtain syndicated loans to refinance existing debts.
Lenders include large financial institutions such as banks and finance companies, as well as institutional investors who want to earn interest by participating in syndicates. In some cases, the lenders sell their interests or assign the loan to other investors so they can replenish cash and reduce their exposure to any individual borrower.
Syndicated Loan Example
In 2018, Broadcom sought $100 billion in a record-breaking syndicated loan. The company was buying Qualcomm at the time for $121 billion. To secure funding, Broadcom had to work with some of the largest financial institutions in the world, including:
- Bank of America Merrill Lynch
- Deutsche Bank
- JP Morgan
- Mitsubishi UFJ Financial Group
- Sumitomo Mitsui Banking Corporation
- Wells Fargo
- BMO Capital Markets
- RBC Capital Markets
- Morgan Stanley
Although those banks are large, they were hesitant to hold the loans themselves, and they were reportedly considering selling portions of the debt to other investors before the deal even went through.
The $100 billion paid for the Qualcomm purchase as well as the costs associated with transitioning Qualcomm operations into Broadcom. The deal was expected to include several segments, including:
- $20 billion for one year
- $4.477 billion for two years
- $19.679 billion for three years
- Another $19.679 billion for five years
- $5 billion as a five-year revolving credit facility
Interest rates ranged from 1% to 1.37% over LIBOR, so they were variable-rate loans, and they had a maximum term of five years.
Federal Reserve Bank of Boston. "Why Do Banks Syndicate Loans?" Download "Full-Text Article (PDF)." Accessed Oct. 4, 2019.
Payden & Rygel Research. "A Primer on Syndicated Term Loans," Accessed Oct. 4, 2019.
Standard & Poor's. "A Guide to the Loan Market," Accessed Oct. 4, 2019.
U.S. Securities and Exchange Commission. "Credit Agreement," Accessed Oct. 4, 2019.