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What lenders perform due diligence?

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The information memorandum provides a detailed description of the borrower, its business and financial condition and the proposed financing to be used by prospective syndicate participants to assess their interest in the transaction and upon which they base their decision to participate.  It is prepared and circulated by the MLA on the basis of information provided by the borrower during the due diligence process.

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Participants “free-ride” on the due diligence and monitoring performed by the lead arrangers and they mutually benefit from each other’s monitoring effort and shared information.  Nevertheless, arrangers require participants to perform their own independent due diligence and credit analysis of the transaction with the information provided in order to join the syndicate.

Know your customer (KYC) is the process of a bank identifying and verifying the identity of its clients and a regulatory requirement for enhanced due diligence.  In loan syndication, KYC checks on each obligor (borrower and guarantors) will need to be carried out by the original lenders before facility agreement signing.  In the US loan market, the USA PATRIOT Act requires financial institutions to verify the identity of their borrowers and guarantors.  The obligors are required to provide requested information to the facility agent for the purpose of satisfying KYC requirements.

The conditions to funding the bridge will include [...] the delivery of “know your customer” information required by law with respect to the borrower.

– Chung & Kagan, 2018

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