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What is the arranger-borrower relationship?

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Relationship lending establishes long-term contracts between borrowers and lenders with a view to provide banking services that are considered part of a continuing bank-customer relationship.  Market-based transaction lending involves the origination, selling and trading of the borrower’s debt without any intention to develop a long-term relationship with the borrower.

Syndicated loans are characterized as a hybrid of relationship lending and transaction lending.  While syndicated lending is primarily viewed as relationship lending by European domestic banks, US-based banks tend to treat it as transaction lending.

About six out of seven loans (87%) have lead arrangers that are banks (as opposed to finance companies, institutional investors, etc.) and hence are considered having expertise in relationship lending.

The key factor determining whether a lender views itself as a borrower’s relationship lender is the relative size of that lender’s share of the borrower’s debt.  While borrowers generally benefit from established lender-borrower relationships, they commonly become locked in the relationships due to the information advantage of the relationship lenders.

Lead arrangers that are relationship lenders generally commit to a relatively large share of loan to hold on their books (final hold).  Lead arrangers usually do not sell their commitment below their agreed final hold to avoid damaging their relationship with the borrower and other syndicate members.

Relationship banks generally have the expertise to screen and monitor the lending to their relationship borrowers.  They also act as liquidity insurers in situations of liquidity problems of the borrower.

In addition to the informational advantage over other banks, relationship lenders generally have a higher degree of collateralization and are more senior.  This strengthens their bargaining power in any future restructuring negotiation with the borrower.

Although syndicate strategy is the responsibility of the lead arrangers, they will generally accommodate borrower wishes as to the syndication strategy and the invitation of certain other banks to participate as co-underwriters and participant lenders.

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