Loan syndications, also known as refinancing, can have many benefits for lessors. By definition, a loan syndication consists of two or more lenders working together, otherwise known as a syndicate, to provide funds to a borrower in one loan. This is ideal for borrowers requiring a larger sum of money than an individual lender would usually grant them, as each of the lenders in the syndicate provides their own part of the loan.
There are a lot of examples of where loan syndications are used, such as construction projects, real estate, and government initiatives, just to name a few. Equipment purchases, such as heavy machinery or medical equipment, can be of very high value, which can be a high risk for lenders. For example, U.S. hospitals dedicate around $200bn of national health expenditure on medical devices, with the average cost to build a brand-new hospital reaching upwards of $185m. This is a significant cost that is high risk for a sole lender, so an example such as this could be a great use case for loan syndications that spread this risk while also supporting vital projects.
How does it work?
The concept of loan syndication is simple. One lender, known as the “agent,” will manage the loan and its terms, acting on behalf of the other lenders. As the lead, the agent will often undertake the majority of the due diligence and oversee the documentation and repayments, filtering them down to the other banks in the syndicate.
Each loan within the syndicate can have different repayment terms and amounts – for example, Bank A could provide $200M of credit, while Bank B could provide $150M and Bank C $100M, and so on. However, from a customer standpoint, this is just one loan, and the customer will not need to coordinate between the funding partners. A syndicate will always involve at least two banks, and often there can be multiple partners in the deal.
But why do lenders choose to do this rather than continue working with smaller amounts? What benefits does it bring?
Opportunities for bigger projects
Syndications allow lenders to participate in opportunities that are usually too large for one company to offer as a sole lender. While a lender may not offer a significantly higher amount than they normally would, they will have the opportunity to work on much larger-scale projects. This is great for any secured lender’s reputation, presenting them as reliable and opening up a wider range of opportunities to work on.
Better customer satisfaction
Loan syndications allow borrowers to access much greater funds than they would be able to get from a single bank. The borrower also can access these funds as if they were only dealing with one bank, as the syndicate agent will deal with them directly. Repayment terms are clear, as there is a negotiation between the syndicate to make sure the loan is beneficial to all parties.
Reduced exposure to the risk of defaults
This one might seem more obvious; by owning a smaller percentage of the entire loan, the risk is much lower. The lender is now sharing that risk amongst multiple businesses rather than handling it all themselves. After all, $1M is a lot more of a risk for one business than $200,000 split between 5 lenders. In the unfortunate circumstance that the borrower defaults on their debt, there is a much smaller loss.
By participating in a syndication, you also gain access to a wider range of funding opportunities. This minimizes risk by lowering exposure to the same borrowers, industries, or regions and, therefore, lowering the chances of defaults caused by changes in the economies or markets.
How Solifi can help you
What sets Solifi apart is the functionality to include multiple funding partners in a transaction. You can treat each partner individually based on the deal, meaning you can set different fees and share depreciation accordingly. We also provide net accounting, enabling you to be in complete control of servicing the deal and managing the relationship with the other funders. With configurable solutions, you can differentiate each account, allowing individual repayments and a choice over what you share. We work with a number of banks who already leverage our syndication capabilities.
Want to find out more? Start your journey with Solifi today.
