Leveraged Lending

Leveraged Lending and the Syndicated Loan Market

The size and complexity of characteristics inherent in many leveraged transactions require funding through the syndicated loan market. Loan syndications offer many advantages to borrowers and lenders.

Syndicated loans allow borrowers to access a larger pool of capital than any one single lender may be prepared to make available and allow the originating lender the opportunity to provide greater customization than with traditional bilateral relationship-based loans. Syndicated loans are simpler for borrowers and lenders to arrange and less costly than borrowing the same amount from a number of lenders through traditional bilateral loan underwritings. Moreover, there is an active secondary market, and credit ratings for many leveraged loans, which permit more effective credit portfolio management activities. Finally, syndicated loans provide borrowers a more complete array of financing and relationship-based options.

Syndication of leveraged loans allows originating lenders to serve client needs while at the same time ensuring appropriate risk diversification in their permanent loan portfolios. Large bank agents and participants can also capitalize on a lucrative array of fee income from arranging and underwriting the transaction as well as ancillary fee income associated with other banking services provided to the borrower. Corporate borrowers often require banks to participate in their credit facilities before purchasing other corporate treasury products. Participating in a syndicate may be attractive to smaller lenders as well, since it allows them to lend to larger borrowers than their smaller balance sheets would allow in the case of bilateral loans. A syndicate may be valuable in workouts as it can provide for a coordinated means of dealing with a problem borrowing situation, as opposed to an expensive and complex “free for all” of competing claims. However, syndicate membership may also contain numerous nonbank entities, including private equity groups, hedge funds, and investment conduits. These organizations may have risk appetites, investment strategies, and workout motivations that differ significantly from bank members, complicating the workout process.

Previous: Leveraged Lending Defined Next: Distributions and Bridge Financing