The retail market for a syndicated loan consists of banks and in the case of leveraged transactions, finance companies and institutional investors.
Before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit.
Once the pricing, or the initial spread over a base rate (usually LIBOR), was set, it was largely fixed, except in the most extreme cases.
Regional barriers (and sensitivities toward consolidation across borders) have fallen, economies have grown and the euro has helped to bridge currency gaps.
As a result, in Europe, more and more leveraged buyouts have occurred over the past decade and, more significantly, they have grown in size as arrangers have been able to raise bigger pools of capital to support larger, multi-national transactions.
In Europe, the regional diversity allows banks to maintain a significant lending influence and fosters private equity's dominance in the market.
A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving the credit to the vicissitudes of the market.
The arranging bank acts as a salesman, and may be cannot exclude liability in its role of representing the agreement; either through misrepresentation, negligence, or breach of fiduciary duty.
[8] Syndication is generally initiated by the grant of a mandate by the borrower to the arranging bank(s) or ‘lead managers’ setting out the financial terms of the proposed loan.
This might include terms which relate to when the loan is to finance a company acquisition or a large infrastructure project, conferring interests in the lenders.
However, in Maple Leaf Macro Volatility Master Fund v Rouvroy (2009) a loan term sheet was held to create a contract.
In TORRE ASSET FUNDING v RBS (2013) the mezzanine lenders alleged it was the Agent's duty to inform them of when an event of default occurred.
They are; The agent bank's express duty, is to provide information designed to enable lenders to consider how to exercise their right under various facility agreements in relation to accelerating the debt, not to assist with ‘exit’ or liability for misstatements.
Lead bank to engage in such asset sales relate inter alia to over exposure, regulatory capital requirements, liquidity, and arbitrage.
Scheme of arrangement require majority in number (head-count test) whereas if bonds are issued on a global note there is only one true creditor with sub participation through trusts.
To overcome the head-count test issues in bonds: bondholders can be given definite notes (although costly) or on the basis of this right be perceived as contingent-creditors.
Minority lenders who feel oppressed may choose to transfer their debts to other, although conflict might limit the number of buyers willing to reduce price of the loan/bonds.
They refinance the existing capital structure or support a full recapitalization including, not infrequently, the payment of a dividend to the equity holders.
Their primary purpose, however, is to fund M&A activity, specifically leveraged buyouts, where the buyer uses the debt markets to acquire the acquisition target's equity.
In the U.S., all private equity related activities, including refinancings and recapitalizations, are called sponsored transactions; in Europe, they are referred to as LBOs.
The IM typically will include an executive summary, investment considerations, a list of terms and conditions, an industry overview, and a financial model.
As the IM (or "bank book", in traditional market lingo) is being prepared, the syndicate desk will solicit informal feedback from potential investors on what their appetite for the deal will be and at what price they are willing to invest.
The executive summary will include a description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials.
Amendments can range from something as simple as a covenant waiver to something as complex as a change in the collateral package or allowing the issuer to stretch out its payments or make an acquisition.
These are typically large revolving credits that back commercial paper or are used for general corporate purposes or, in some cases, acquisitions.
There are also market-value CLOs that are less leveraged — typically three to five times — and allow managers more flexibility than more tightly structured arbitrage deals.
They are generally lightly levered (two or three times), allow managers significant freedom in picking and choosing investments, and are subject to being marked to market.
As with credit funds, these pools are not subject to ratings oversight or diversification requirements, and allow managers significant freedom in picking and choosing investments.
In the U.S., many revolvers to speculative-grade issuers are asset-based and thus tied to borrowing-base lending formulas that limit borrowers to a certain percentage of collateral, most often receivables and inventory.
[14] For firms seeking financing, issuing corporate bonds is a major alternative option to syndicated loans, as both allow for raising large amounts with medium to long-term maturities.