A traditional Euro syndicated
loan is usually a floating rate loan with fixed maturity, a fixed draw
down period and a specified repayment schedule. One, two or even three
banks may act as lead managers and distribute the loan among themselves
and other participating banks. One of the lead banks acts as the agent
bank and administers the loan after execution, disbursing funds to the
borrower, collecting and distributing interest payments and principal
repayments among lead banks, etc. A typical Euro credit would have
maturity between 5 to 10 years, amortisation in semi-annual installments,
and interest rate reset every three or six months with reference to LIBOR.
In some cases, when the parties-lenders and borrower- do not wish to
publicize the deal, standard practice is dispensed with and a credit is
arranged on a private basis between the group of leading banks and the
borrower. These are known as Club Loans.
A revolving credit is similar to the above but permits greater flexibility
in the draw down and repayment schedules allowing the borrower to
repeatedly draw the loan or a portion thereof and to repay what it has
drawn at its discretion or according to a formula.
In a standby facility, the borrower is not required to draw down the loan
during a fixed, pre-specified period. Instead, he pays a contingency fee
till he decides to draw the loan at which time interest begins to accrue.
Syndicated loans can be structured to incorporate various options. As in
the case of FRS, a drop lock feature converts the floating rate loan into
a fixed rate loan if the benchmark index hits a specified floor. A
multi-currency option allows the borrower to switch the currency of
denomination on a rollover date.
Security in the form of government guarantee or mortgage on assets is
required for borrowers in developing countries like India.
The cost of a loan consists of interest and a number of fees-management
fees, participation fees, agency fees and underwriting fees when the loan
is underwritten by a bank or a group of banks. Spreads over LIBOR depend
upon borrower's credit worthiness, size and term of the loan, state of the
market (e.g. the level of LIBOR, supply of non-bank deposits to the EURO
banks,) and the degree of competition for the loan.
Click here for Guidelines on ECBs-External Commercial Borrowings.