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What is the borrower-arranger relationship?

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Relationship lending is an on-going bank-borrower relationship that is established with a view to provide continuing banking services to the borrower.  Market-based transaction lending involves the origination and trading of the borrower’s loans without any intention to provide to the borrower any further banking services.

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.

Syndicated lending is a hybrid of relationship lending and transaction lending.  While in Europe syndicated lending is primarily relationship lending, US-based banks usually treat it as transaction lending.

The key factor determining whether a bank is a relationship lender is the relative size of the bank’s share of a borrower’s total debt.  While borrowers generally benefit from such relationships, the proprietary and privileged information of the banks tends to lock them into the relationships.

Lead arrangers establish a relationship with borrowers, originate, negotiate and underwrite the financing as well as organize the syndicate and arrange and lead the syndication.  After syndication closing, the lead arranger commonly also acts as a major lender, the facility agent and the issuer of any ancillary facilities.

Lead arrangers that are relationship lenders generally commit to a relatively large share of the financing to hold on their books (final hold).  They usually do not sell their commitment below their agreed final hold to avoid damaging their relationship with the borrower and other syndicate members.

Relationship banks normally have sufficient knowledge about their relationship borrowers and the expertise to screen and monitor them.  They also act as liquidity insurers in case of any borrower liquidity shortages.

[Early signals of borrower default] are less important for lenders that have a borrower relationship because these lenders have customer-specific information that facilitates monitoring.

Relationship lenders also commonly obtain a higher degree of security and are more senior than other lenders in structured finance transactions.  This strengthens their bargaining power in any future restructuring negotiation with the borrower.

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