When the amount of financing required by a borrower is too large for a relationship bank to provide on its own, the club deal may be used. In a club deal, a group (syndicate) of banks underwrites the full amount of a multilateral loan at the outset of the transaction with no intention to subsequently reduce their final hold. All club members underwrite the loan and act as arranger.
Since club deals are transacted on a take-and-hold basis, on which the arrangers (underwriting banks) advance the loans without the intention to on-sell (resell) to participant lenders – it precludes general syndication of the financing. The club deal syndicate is closed when the facility agreements are executed (signed), without general syndication and without subsequently trading the loan in the secondary market.
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As with other multilateral lending, club deals use documentation common to all parties. The borrower solicits and assembles the lenders and negotiates jointly with them on the final terms and conditions of the loan but separately on each lender’s participation. The borrower effectively syndicates the loan itself, using a lead arranger only to draft the documents and administer the process.
Normally the borrower’s main relationship bank is formally assigned the lead arranger role, coordinates the syndicate (“club”), and acts as the facility (administrative) agent. While the commitment fees are commonly shared pro rata, the lead arranger is compensated for coordinating the drafting of the financing documentation and, as facility agent, receives the agency fee during the life of the loan.
Club deals give borrowers more direct control over the financing and are usually cheaper than firm-commitment underwriting, since no syndication costs are incurred nor are the banks exposed to any syndication risk. They are commonly used to finance leveraged buyouts and other private equity investments.
There have been club deals where a number of banks underwrite a deal, but the limited number of banks currently lending means that these deals are becoming increasingly difficult to put together.