The lead arrangers may go directly into a single-stage general syndication, rather than a two-stage syndication with sub-underwriting. General syndication is the “retail” phase in the syndication of financing that follows the initial underwriting or sub-underwriting (primary syndication) phase of the financing transaction, in which the underwriters actively search for lenders in order to reduce their exposure to their respective final hold amount (“sell down target”). During general syndication, banks are invited to offer commitments in defined ranges.
With single-stage general syndication, lead arrangers are exposing themselves to greater syndication and credit risk if the deal is undersubscribed. Through sub-underwriting, the MLA’s chief concern is the reduction of syndication risk, which is risk that an underwriter will not be able to reduce its participation in a syndicated financing to its final hold by obtaining commitments from participant lenders in general syndication. The credit risk exposure of lead arranges is also reduced by the total commitment amount of the sub-underwriters.
The upfront fee mainly compensates for loan syndication cost and syndication risk at loan initiation.
Once the financing is underwritten, the facility agreement is signed by the arrangers. Where the financing is not underwritten, the signing takes place only after all of the financing has been placed with lenders.
The syndication ends when the borrower and all lenders sign the facility agreement. As of signing, the contract parties are bound by the terms and conditions of the facility agreement. Regardless of the signing date, drawdown may take place only as of financing closing, when conditions precedent to drawdown are satisfied by the borrower.