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Insight: No Groan Loans

There are cycles in every market as the forces of supply and demand swing
first one way then the other. In the world of investment-grade corporate
borrowing, it seems that the market has moved away from the lender and is now
running strongly in favour of the borrower.

As corporates wake up to this fact, they are discovering that, provided they
are in sound financial health, they have a good deal more power vis à vis their
bank than might once have been the case.

One consequence of this is that companies locked into a bank syndicate on
what one might euphemistically call “outdated terms”, can now look to break that
syndicate and establish a separate relationship with each bank in the syndicate,
or with a subset of the banks perhaps supplemented by a few new faces.

The prospect of easier terms is alluring, but as Andrew Meakin, a specialist
asset finance and banking lawyer with Maclay Murray & Spens, explains,
finance directors need to understand the ramifications of syndication before
they can work out whether or not there really are advantages to a desyndication

The essential elements of a bank syndication can be easily set out.

“In a syndicated deal, the key benefit you get is that a number of banks can
lend to the same borrower or group of borrowers on the same terms,” Meakin
explains. “This means that you have one loan document, not a multitude of loan

It also means that where the lenders require security, there is just one
security document, and one of the banks – sometimes, but not necessarily, the
lead bank – will be designated as the security trustee on behalf of all the

Similarly, one of the banks will be designated as the agent bank, and will
undertake all the administration on behalf of all the banks.

The agent bank is at the forefront of the relationship with the borrower. It
is the bank that the borrower corresponds with, sends its management accounts to
and so on. It also distributes all payments from the borrower on a pro rata
basis to the banks in the syndicate.

“The genesis of these deals is that a syndicated loan can start with just one
bank but the documentation will be set up as if there are other banks involved,”
Meakin says.

The arranging bank can then look to counterparts in the syndicated loans
market to join the syndicate. Alternatively, the syndicate can be put together
at the outset by either the borrower or the lead bank.

The borrower will have to sign up to terms limiting its ability to borrow
further outside the syndicate (since the banks will be worried about the
borrower overleveraging itself) and there will be all kinds of rules setting out
what constitutes default events.

Whatever the precise set-up, the key point is that because it is a syndicate,
the same terms will apply for all the banks.

When a borrower decides to break the syndicate, it will often finish up with
all kinds of duplication of documentation instead of its former single deal with
multiple banks. Where the loan requires security, complex inter-lender
arrangements then have to be entered into. The borrower has to work out if the
advantages of desyndication really do outweigh the costs.

Much can be done by renegotiating with the original syndicate without
breaking it. Where the borrower simply wants to borrow more, this can be
achieved without tinkering with the original security documentation.

Breaking the syndicate, however, gives the borrower a chance to introduce a
little competitive tension and better individual rates among the participating
banks. However, the borrower will certainly want to keep common terms even with
multiple individual borrowers.

“It’s to everyone’s advantage,” Meakin explains.

Wide variations from lender to lender as to what constitutes the set of
default events are inherently dangerous. A minor infringement of one lender’s
terms, such as being sued by a small supplier, might trigger a default with that

While this might not be catastrophic in that the company could explain the
insignificance of the action to the lender concerned, the fact that the contract
is now in default is absolutely going to trigger the default clauses that the
company has with all its other lenders.

If that happens, the company will find itself in the middle of an almighty
debt crisis, and all because it didn’t agree common terms with all of its banks.

If the company agrees common, sensible terms, then such a small action will
not give rise to such a catastrophic ripple effect.

Again, none of this arises with a syndicated loan, because a loan syndicate
has common documentation to start with.

“Sometimes flexibility can come at too high a price,” Meakin warns.

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