What is due diligence?

After mandates are awarded, mandated arrangers commit themselves to assemble a syndicate to arrange financing on the borrowers’ behalf, subject to satisfactory due diligence and documentation.  The info memo is prepared and circulated by lead arrangers to prospective syndicate participants on the basis of information provided by the borrowers during the due diligence process.

Due diligence is the detailed assessment of the borrower’s creditworthiness and legal capacity of to enter into the finance agreement, the risk involved in the transaction and the suitability of its terms.  It is performed by underwriters to obtain underwriting approval and by lenders to get credit approval for a specific amount and submit formal commitment letters to the bookrunner requesting participation at a specific level (“ticket size”) and their conditions for participation.

In the due diligence process, lead arrangers acquire public and private information about the borrower and the transaction and select the appropriate information to share with syndicate members. Banks decide whether to join a syndication by performing their own independent due diligence and credit approval. The type of due diligence performed by arrangers and participant lenders depends on the nature and purpose of the financing.

Arrangers require participant lenders to perform their own independent due diligence and credit analysis of the transaction in order to avoid liability.  Nevertheless, lenders usually rely to some extent on arranger due diligence performed in preparing the info memo and legal documents.

The closing fee is paid by the underwriters to lenders that participate in general syndicate.  It is calculated on each lender’s final allocation and designed to compensate the lenders for their due diligence and credit approval.