In a best-efforts deal, the arranging bank agrees to use its “best efforts” or “commercially reasonable efforts” to market a financing facility to lenders and other investors, generally with no obligation of the arranger to provide any of the financing itself unless and until the facility is successfully syndicated. The arranger commits to underwriting significantly less than the full amount of the required financing, typically only the final hold amount it intends to take on its own books, and attempts to place the rest in the market.
Best-efforts are traditionally used for risky borrowers, complex transactions or syndications in bad markets. With the arranger providing no guarantee for the full amount, the borrower assumes the risk that the financing it requires will not be raised (syndication risk). If not fully syndicated, either the terms of the financing are renegotiated or the transaction does not close.
The borrower pays an arrangement fee to the lead arranger for its services and a closing fee to the other lenders for their commitments. The arrangement fee in a best-efforts deal is considerably lower than in firm-commitment underwriting because the arranger bears no syndication risk, although higher fees or a larger margin may have to be paid to encourage sufficient lender participation in the transaction.
In practice, approximately 70% of deals are done on an underwritten basis. For “new money” deals—those that provide borrowers with new financing rather than refinance an existing loan—the rate is closer to 90%.