What are loan syndications?

Syndication is a multilateral financing arrangement in which one or more originating commercial or investment banks arrange financing on a borrower’s behalf by obtaining the commitment of a group underwriters and/or lenders to participate in the transaction to provide the amount of funding required by the borrower.  As regards the formation of syndicates, a distinction is made between direct syndication and indirect syndication.

Syndicated facilities involve two or more bank lenders for the purpose of providing financing to a borrower. Compared to bilateral lending, syndicated loans involve complex issues related to coordinating the relationship between the syndicate members.

In a direct syndication a multilateral financing facility is marketed and distributed to more than one lender, who commits to provide financing directly to the borrower on uniform terms and conditions, using common documentation that establishes a direct legal relationship between the borrower and the participant lenders.  Firm-commitment underwriting, best-efforts arrangements and club deals are forms of direct syndication.  Whereas club deals involve only primary syndication, firm-commitment underwriting and best-effort arrangements also require secondary syndication.

Indirect syndication is participation syndication, which is marketed to participating banks that provide the funding of a bilateral financing facility to the loan originator.  The legal relationship between the borrower, the loan originator (grantor) and the participating lenders depends on the governing law under which the participation is executed.