Where primary syndication is included after the initial underwriting, the total commitment of mandated lead arrangers is first marketed and distributed among sub-underwriters. Each sub-underwriter commits to a certain portion of the initial underwritten amount, which obligates the co-underwriter to fund that part of the total financing.
Lead arrangers benefit from syndication by receiving arrangement and underwriting fees, while decreasing credit and syndication risk. Participant lenders benefit by investing in the loan without incurring origination and servicing costs, whose primary role it is to fund part of the loan.
During 2004-2006, Bank of America participated in 1,133 syndicated loan facilities (39%) that were arranged by JPMorganChase in the U.S. market. At the same time, [JPMC] participated in 875 loan facilities (28%) arranged by [BOA].
Reciprocal arrangements are common, where lead arrangers often participate in the syndicates that are led by their participant lenders, and vice versa. Reciprocal participation provides incentive for lead arrangers to monitor borrowers, as it is the implicit condition that enables lenders to participate in the loans and obtain benefit as “free-riders”. Reciprocal participation holds the lead arranger, as the relationship lender, accountable for monitoring its borrower.
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