The Syndication Process
Week 2
Index
1 What Is a Syndicate?
2 What Roles Do Banks Perform?
3 What Syndication Strategy Can Be Used?
4 How Much Does the Customer Pay?
5 How Has the Crisis Reshaped the Market?
6 Takeaways
LEGEND:
Additional content 2
CLIP 1
WHAT IS A SYNDICATE?
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What Is a Syndicate?
Definition
A syndicate is
agroup of banks
with the goal to provide funds
to the SPV.
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What Is a Syndicate?
Why a Syndicate?
1 Risk Sharing
2 Creating a network among banks (marketing and relations)
Key Issues
1 Number of banks (many vs. few)
2 Selection of banks
3 Mandated lead arranger’s final take
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What Is a Syndicate?
Key Issues
1 Number of Banks
Many Banks Few Banks
1. Reduction of risks for the 1. Higher degree of
PROS banks involved in the confidentiality
syndicate 2. Reduction of coordination costs
and decision-making processes
1. Greater risks due to the
1. Higher coordination costs
underwriting of high
CONS 2. More potential of portions of the loan
confidentiality issues
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What Is a Syndicate?
Key Issues
2 Selection of Banks
Common practice in the capital markets arena sees a
reciprocation of invites to participate in deals.
Tip #1 Underwritten Rule: If the MLA invites a bank to participate
in the syndicate, very likely the invited bank will return the
favour when it gets a mandate.
Specific characteristics of the project, of the offer or the
Tip #2
borrower could require specific institutions to be included.
A close relationship between the issuer and specific banks may
Tip #3
require their involvement in the project.
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What Is a Syndicate?
Key Issues
3 Mandated Lead Arranger’s Final Take
Who? MLA together with the underwriters
What? Determine the portion of the loan to be sold in the market and
what to retain on their own balance sheet.
Selling a high portion of the loan…
PROS 1. Download a part of the credit risk to third parties
2. Frees liquidity
3. Increases the return on capital employed
1. Wrong signal to the market (i.e. the MLA doesn’t
CONS
trust the borrower’s ability to repay the debt) 8
CLIP 2
WHAT ROLES DO BANKS PERFORM?
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What Roles Do Banks Perform?
Banks’ Roles
• Mandated Lead Arranger: It is the main actor; it designs the operation and
invites all the other banks.
• Co-Lead Arrangers: They find the banks willing to participate in
the loan together with the MLA.
• Participants: Subdivided into Arrangers, Co-Arrangers, and Lead Managers
• Documentation Bank: Organizes all the finance documentation.
• Agent Bank: The bank that acts as a representative of the syndicate.
It controls the SPV’s bank accounts.
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What Roles Do Banks Perform?
Underwriters
HK The Honk Kong
MLA 7 banks
Disney Park
Project
Co-Lead Arrangers
Arrangers HK
18 banks
Co-arrangers HK
3 banks
Lead HK
Managers 4 banks 11
CLIP 3
WHICH SYNDICATION STRATEGY CAN BE USED?
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Syndication Strategies
Traditionally banks have used two strategies:
1 Single Stage Syndication
1. The most profitable option for the MLA
2. Strategy suitable for:
Committed itself alone a. Periods of high liquidity in the market
to underwrite the loan b. Projects sound both under an
industrial/technical and financial standpoint
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Syndication Strategies
Traditionally, banks have used two strategies:
2 Dual Stage Syndication
Strategy suitable for:
The MLA and a small 1. Uncertain periods of time in the market
group of banks commit 2. Deals with specific features
themselves to 3. When the deal is perceived as “aggressive”
underwrite the loan.
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Syndication Strategies
Financial turmoil and increased volatility make these two
strategies unfeasible.
Club deals become the most used solutions since they are:
1 Quicker to execute,
2 but lower return on capital employed for the arranger(s)
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CLIP 4
HOW MUCH DOES THE CUSTOMER PAY?
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Fees Distribution
The borrower pays the MLA
The MLA negotiates
SPV/Borrower the split of the
fees with the other
banks
SPV / MLA
Borrower
MLA
Negotiation process
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Fees Distribution
Types of Fees
Fees to the Arranger
– Arranging fee: 0.5% to 1% of the total debt amount
(the arranger can deduct 2-3 months of retainer fee for a joint mandate
advisor-arranger).
Fees to the Managers
– Up-front management fee: Paid as a lump-sum at the closing of the deal.
– Committment fee: To all the banks of the syndicate as a compensation for
their final stake.
Fees to the Agent Bank
– Agency fee (40/100 thousand euros, depending on the number of banks
included in the syndicate).
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Fees Distribution
An Example of Fee Distribution in a Syndicate
Waterfall structure: SPV pays the arranger, which pays back part
of the fees to the other members according to their respective
role in the syndicate
Syndicated amount 200.000.000
Arranging fee 1%
Co-Arranging fee 0,80%
Up-front Management fee 0,20%
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Fees Distribution
An Example of Fee Distribution in a Syndicate
Members of Financed
Role Fee Underwritten Amount
the Syndicate Amount
A Bank Lead Arranger Arranging Fee 100.000.000 25.000.000
B Bank Co-Arranger Arranging Fee 100.000.000 25.000.000
C Bank Manager Up-front fee n.a. 40.000.000
D Bank Manager Up-front fee n.a. 50.000.000
E Bank Manager Up-front fee n.a. 60.000.000
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Fees distribution
An Example of Fee Distribution in a Syndicate
Fee B Bank C Bank D Bank E Bank F Bank
Arranging Fee 2mil - - - -
Co-Arranging Fee (800k) 800k n.a. n.a. n.a.
Up-front
(350k) 50k 80k 100k 120k
Management Fee
Total Fees 850k 850k 80k 100k 120k
Return on capital employed
Higher when underwriters successfully transfer a larger part
of the syndicated loan to managers/participants
Return on capital
B Bank C Bank D Bank E Bank F Bank
employed
3.40% 3.40% 0.20% 0.20% 0.20%
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CLIP 5
HOW HAS THE CRISIS RESHAPED THE MARKET?
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Financial Crisis and the Market
Basel III: A comprehensive set of reform measures designed to improve the
regulation, supervision and risk management within the banking sector.
Among other changes, here, we can refer to the increased level of
capitalization that is now required from banks, and to the net stable funding
ratio (NSFR) that has been developed to provide a sustainable maturity
structure of assets and liabilities with a time horizon of one year.
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Financial Crisis and The Market
1 Recent measures of monetary policy worldwide
1. Federal Reserve (FED)-Quantitative Easing*
2. European Central Bank (ECB)-“Whatever it takes …’**
3. Bank of Japan (BOJ)-Extraordinary monetary and quantitave easing
Consequences
a. Compression of yields on almost all asset classes.
b. Traditional Institutional Investors are desperately looking for yields.
2 New investors are approaching the infrastructure finance business
1. Shift from ‘Bank to Bank’ syndication to ‘Bank to Institutional Investors’ syndication
2. Infrastructure debt funds
*Quantitative Easing is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become
ineffective by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those
financial assets and lowering their yield, while simultaneously increasing the monetary base
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** ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’ (Mario Draghi, President BCE)
CLIP 6
TAKEAWAYS
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Takeaways
1 Syndicate
– Group of banks
– Different roles
2 Banks
– Roles
– Hierarchical structure
3 Financing
– Single stage without underwriting
– Dual stage with underwriting
4 Customer/SPV
– SPV pays once the MLA
– The MLA distributes the fees
– Fees pay underwriting and lending
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