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Syndicated loans are lending instruments that are underwritten by a group of lenders, rather than by a single lender. Lenders in this particular type of loan work through one or more investment or commercial banks, which are known as arrangers. The structure of the syndicated loan generally calls for one of the arrangers to act as the administrator, thus providing the borrower with a clear point of contact for all matters that have to do with the loan arrangement.
There are several different ways that a syndicated loan can be structured. One approach is known as the underwritten loan. With this strategy, the arrangers guarantee the total value of the loan, an approach that in effect helps to ensure that the lenders do receive full repayment. Because this approach places more risk on the arrangers, there are often higher administration fees built into the loan structure that help to offset that risk.
A slight variation of the underwritten approach is known as the best-efforts syndication loan. Here, the arrangers underwrite a portion of the total value of the loan, leaving the lenders liable for the remainder. This approach has been used in situations where the degree of risk was considered somewhat unfavorable by the arrangers, or where the terms of the loan were considered to be highly complicated. In spite of the fact that the arrangers do not underwrite the total value of the loan, this model has become a popular option that is used in many situations.
Another approach to a syndicated loan is known as the club deal. Sometimes used to underwrite relatively smaller business loans, the arranger is often also a lender, and shares in the distribution of the payments made by the borrower, including the fees, interest and principal portions of the repayment. With this approach, the arranger is considered a member of the lending club, and on a par with all the other lenders.
When it comes to the amount of interest that can be charged on any type of syndicated loan, prevailing rates within the country of origin tend to apply. In the case of loans of this type that are created in the United Kingdom, the London Interbank Offered Rate, or LIBOR, usually applies. It is not unusual for lenders in countries outside the UK to use the LIBOR as the benchmark when the syndicated loan is issued to a borrower with international connections.
@JessicaLynn - Yes, this strategy does sound like it would minimize risk somewhat. I think an underwritten loan is probably the least risky for the lenders. If the arranger carries some risk also, it distributes the share of risk even more.
However, I think there is always some risk with money lending. Even though there are laws in place to protect lenders, what if the company goes under?
I can understand the appeal of this loan in business. It seems like having having a group of lenders lessens the risk somewhat. Since the entire group is sharing the risk, each individual is risking a lot less than if they were the sole lender.
I think it's a good idea that there is usually one point of contact for the borrower. I imagine it would be really confusing if you had to deal with a different person each time! Also, the lenders would really have to communicate with one another to make sure they aren't each telling the borrower something different.
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