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What determines borrower-MLA relationships?

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Lead arrangers develop a relationship with borrowers, originate the facilities, negotiate terms, underwrite the financing, and arrange and lead the syndication of the facilities.  After syndication closing, the lead arranger generally also acts as a lender, the facility agent and the issuer of any ancillary facilities, such as a standby letter of credit.

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.

Lead arrangers take a relatively large share of loan onto their books (final hold).  They generally do not sell their commitment below their final hold, to avoid damaging their relationship with the borrower and other syndicate members.  Furthermore, lead arrangers may prefer to hold a larger amount of the loan rather than share fees with syndicate participants.

Lead arranges earn the arrangement fee for originating the financing and arranging the syndicate and an underwriting fee when acting as underwriter.  Where the lead arranger also acts as the facility agent the facility fee is earned.  If the lead arranger provides a letter of credit together with a revolving facility, the letter of credit fee is also earned and not shared with other syndicate participants.

Relationship lenders generally have a higher degree of collateralization, are more senior and enjoy an informational advantage over other banks.  This strengthens their bargaining power in any future restructuring negotiation.

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