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Syndicated lending - the essentials for a successful deal Back  
BNP Paribas recently co-lead managed a E500 million syndicated term loan and facility for ICC Bank with Bayerische Landesbank Gireozentrale. Among the participants in the 21 bank syndication were Westdeutsche Landesbank (Ireland), Banca Commerciale Italiana (Ireland), IIB Bank, Bank of Scotland, Bankgesellschaft Berlin (Ireland) and Unicredito Italiano Bank (Ireland). Simon Alloca of BNP Paribas sets out the process involved in syndicated borrowing.
The syndicated loan market can trace its origins back to the 1960s. Despite the growth and sophistication of alternative international debt capital markets (e.g. bond funding in all its guises), the syndicated loan market continues to enjoy a major position in the funding plans of many borrowers.

World economic growth, the globalisation of financial markets, the arrival of the euro and the expansion/acquisition/consolidation trend in major industrial sectors such as telecoms, information technology and pharmaceuticals has helped contribute to the increasing importance of the syndicated loan market. The market’s ability to quickly mobilise huge amounts of capital for high profile, usually acquisition led, financing is its major strength but, as this article explains, the syndicated loan market has wide appeal for a variety of both local and international borrowers.

The depth of the market in Europe is illustrated by the growth in 1999 syndicated lending. Total financing exceeded €500 billion for the first time and was some 65 per cent ahead of 1997’s financing record. (See graph and accompanying table of top arrangers).

The ever-changing face of today’s corporate world has clearly demonstrated the speed, efficiency and flexibility of the syndicated loan product as never before. There have been many high profile transactions this year for major international names for example France Telecom, Vodafone and Lafarge.

Irish borrowers, both corporates and financial institutions, have been enthusiastic users in recent years, exploiting Ireland’s Euro membership and increased international visibility, courtesy of the ‘Celtic Tiger’.

However raising money from the bank market is not all about industry consolidation and acquisition. It is also about having a genuine financing need and whether you wish to raise €40 million or €40 billion the process is basically the same.

A demanding but worthwhile process
The first step is to identify the nature of the financing need (i.e. general corporate purposes, acquisitions, refinancing or a standby line). It is important to approach only those banks you would consider as potential arrangers. Depending on the size of the transaction, the consultation should be with no more than five or six banks. Typically these will be existing relationship banks although there are times when a “New Bank” may be considered for its arranging or placing power.

In assessing the proposals from the invited banks it’s important to keep your objectives in mind. It is also vital that you assess the banks on their ability to arrange the appropriate financing and their standing in the financial market both domestically and internationally.

The invited banks should be providing their view of the market, a syndication strategy and a liquidity analysis along with details of the resources that they will make available to you and of course a detailed term sheet. A short list of two/ three banks should then be selected to explore their proposals further with a mandate being awarded thereafter.

If everything goes according to plan, the whole process from mandate to signing should take no more than 8 weeks. This can be split into three distinct phases, pre-launch, general syndication and closing.

During the pre-launch phase there are certain key events to be carried out. The first is the compilation of the Information Memorandum integral to the launch of the deal. This will be done in conjunction with the arranger(s) and will contain, amongst other things, an executive and transaction summary along with key investment considerations. It will also have details of the borrower’s business along with operational and financial information.

If the financing is for an acquisition then details of this will of course be required. Other items that need to be addressed at this time are the invitation letter, the bank presentation to the potential lenders, the appointment of the respective law firms for both the banks and borrower and then of course the management of the financial press/general media.

One of the key events that needs to be co-ordinated and prepared is the bank presentation. This is an opportunity for the borrower to present itself to the banks and in some circumstances it will give the banks the opportunity to meet the senior management of the company for the first time.

General syndication commences upon the invitation letter being sent to the potential participating banks. At this point it is appropriate for the borrower to contact its relationship banks to discuss the transaction with them emphasising that their participation is expected. The bank presentation will take place within one week of the launch of the syndication.

The invited banks are given approximately two weeks to obtain credit approval and throughout the process the arranger should be in regular contact with the invited banks making sure that they have all the information they need to get a positive response from their credit committees.

With the banks committing to lend, we then move into the third phase of the syndication “the close”. The legal documentation, agreed by the borrower and the arranger during the general syndication process, is sent to the committed banks for their comments and review. All the necessary administration details are collected and the signing will usually take place within ten days.

It is important that open channels of communication are maintained between the borrower and the arranger throughout. This ensures that the whole process can be clearly monitored and any potential problems spotted and resolved quickly.

If there are going to be problems for the syndication these should emerge early on in the process. The common problems are price (too aggressive), structure (covenants too weak), limited information to assess the credit risk and lack of depth to the bank relationships.

Advantages for borrowers - not just price
The challenge for the arranger is to meet both the expectations of the borrower and the market in terms of price and structure. It is not always the best policy to go with the cheapest price because reputational risk, whilst non-quantifiable, is just as real as market risk. Borrowers should always remember that the price they are setting now has a major influence over future pricing.

Whilst the primary purpose of a syndicated loan is to raise money, it has other benefits as well. It can be used to develop new bank relationships or just as easily to reduce the number of bank relationships. A syndicated loan can enhance a borrower’s market profile and help the borrower to keep abreast of current market conditions. All these issues should be discussed between the borrower and the arranger.

So far this year in Europe, we have seen a plethora of so called ‘jumbo deals’ and given the ongoing continued high level of cross border activity and industry consolidation, we can expect further ‘mega’ financing deals in the second half of the year.

There is always going to be a question of liquidity and this, to a certain degree, is a reflection of price, structure and sector. However an awareness of more general issues is vital, for example bank risk and liquidity appetites, other competing deals in the market as well as other non specific issues such as market sensitivities to international events (Russia, South America).

Irish borrowers
The Irish market this year has seen a number of institutions come to the market, some of which have been more successful than others. With all of these, the perceived credit risk, price and the attitude of the borrower to its banks, have been paramount in their relative success. Given the continued favourable economic outlook for Ireland and the status enjoyed by a growing number of Irish borrowers in international debt markets, we can reasonably expect that syndicated finance will play a material part in the business expansion of both the Irish corporate and financial sectors.

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