What is loan syndication?

Syndication is the arranging, structuring, marketing and distribution of multilateral financing on a borrower’s behalf to a group (syndicate) of underwriters and/or lenders by obtaining their commitment to provide the amount of funding required by the borrower.  The syndication strategy determines such matters as the form of syndication (firm-commitment, best-efforts or club deal) and the syndicate structure.

Syndicated lending involves two or more bank lenders that participate in the transaction for the purpose of providing financing to a borrower.  Compared to bilateral lending, syndicated lending is a complex operation involving the arranging, structuring and marketing of the transaction and coordination of the relationship between the syndicate members.

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In a direct syndication a multilateral financing facility is arranged and distributed (transferred) to more than one lender, who establish a contractual relationship with the borrower and commit to provide the financing directly to the borrower on uniform terms and conditions.  Common documentation establishes a direct legal relationship between the borrower and the participating lenders.

Firm-commitment underwriting, best-efforts arrangements and club deals are forms of direct syndication.  Whereas club deals call only for banks to co-underwrite the loan, firm-commitment underwriting and best-effort arrangements also require the involvement of participant lenders.

Indirect syndication is participation syndication, where participating banks provide the funding of a loan to the loan’s originator, without any direct relationship to the borrower.  The legal relationship between the borrower, the loan originator (grantor) and the participating lenders depends on the governing law under which the participation is executed.