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Syndication of loan is the process of associating a group of moneylenders in financing various portions of a loan for an individual borrower. Loan syndication commonly arises when a borrower needs an amount too large for a single lender to grant or when the loan is outside the reach of a lender's risk exposure levels. Thus, multiple lenders establish a syndicate to accommodate the borrower with the required capital.
The agreements between bankers and loan recipients usually need to be executed by a corporate risk manager to conquer disagreements and to impose contractual obligations. The primary banker conducts most of this due diligence, but lax oversight can enhance corporate costs. Company legal adviser may also be required to make loan covenants and obligations of the lender.
For instance, the company goes to JPMorgan for a bank loan. The bank decides to form a loan syndicate as the loan amount is outside the bank's risk tolerance capacity. JPMorgan acts as the lead agent and brings together other banks to participate.
Syndication of loan is often used in corporate funding. Firms seek corporate credits for numerous business purposes that include funding for buyouts, mergers and acquisitions, and other capital outgo projects. These projects often demand a high amount of capital that typically beat a single moneylender's resource or underwriting capability.
Loan syndication allows any single lender to provide a jumbo loan while preserving a more reasonable and manageable loan exposure because the associated risks are distributed with other lenders. Each lender's liability is confined to their share of the loan concern. Generally speaking, except for collateral requirements, most of the terms are uniform among bankers. Collateral assignments are usually attached to different assets of the borrower for each lender. Typically, there is only one agreement for the complete syndication of the loan.
For most loan syndications, a lead financial institution is used to organise the transaction. This lead institution is known as the syndicate agent. This agent is also responsible for the initial transaction, charges, agreement and compliance reports, repayments throughout the loan, loan monitoring, and overall reporting for all lending parties.
A third party or additional experts may also be applied throughout various phases of the loan syndication or repayment process to help with several aspects of reporting and monitoring. Loan syndication services require a high amount of fees because of the comprehensive reporting and coordination needed to complete and manage the processing of the loan.
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