Syndicated Loan or Herding Cats?
When it comes to syndicated loans, one of the most frequently asked borrower questions is, How should I manage the composition of my lender group... starting with the agent? Prior to 2008, the answer was relatively simple. Borrowers would typically run a bidding process among a number of qualified banks and, upon awarding the deal, would engage the winning lender to act as their sole agent in underwriting (or arranging) the financing. The agent would be responsible for all aspects of the capital raise and, in many instances, the borrower would have relatively little direct involvement with its prospective lenders.
The disruption of the financial markets that occurred in 2008 reminded Agent banks of the very real risks involved in underwriting large loans caused borrowers to think deeply about the importance of managing both underwriting risk and lender relationships and made syndicating loans to more cautious participant banks feel, at times, like herding cats. What has resulted is a syndicated loan market with many more deals that are co-led between two (or sometimes more) Lead Arrangers than had been the practice pre-2008. Borrowers are also more actively managing lender relationships in order to balance relationship considerations, transaction costs and ease of execution.
What issues should a borrower consider when planning for a large syndicated loan?
- Relationships. The relationship between a borrower and its banks is vitally important for a successful syndication and is only exceeded by the relationship between the borrower and its agent(s). Who do you know well and like? Will they support you in lean times?
- Costs. Using a single agent bank to underwrite your deal may result in a higher underwriting fee since all of the risk of the sale of the loan rests with that lender. The involvement of a second agent will reduce the risk of sale that is borne by a single lender and, therefore, may lower costs. However, as we discuss below, co-agented deals can be more difficult to execute.
- Efficiency.Sole agented deals can be more efficiently executed because there are fewer voices at the negotiating table. Having to worry about two separate institutions and their particular approval processes adds complexity to the execution of the transaction. Sometimes there can be too many cooks in the kitchen!
- Sponsorship.The involvement of additional agent banks demonstrates market acceptance and can provide sponsorship benefits for other lenders considering the transaction.
- Execution Success.Agent banks will typically provide larger commitments than other participating banks and, therefore, will reduce the amount of the loan that is required to be sold, increasing the likelihood of success.
- Banking Requirements.Balancing the need to sell your loan with the need for banking services can be tricky. Lenders today seek more than just a lending relationship and the more of them that commit to your loan the more "mouths" you will have to "feed". Consider the optimal number of banking service providers you will need for your business and aim for that.
- Administrative Burden. More lenders can mean more difficulty in maintaining your loan after the closing; think lender voting for amendments and waivers. More agents can mean greater involvement from the borrower to mediate disputes. The right agent(s) can save the borrower a great deal of stress.
Choosing a Strategy
Given these considerations, what is the right strategy - a single agent or a co-led deal? How many lenders should be involved? The best place to start answering these questions is with your PNC relationship manager. They can help you with preliminary questions and, when you're ready, will connect you with Loan Syndications specialists who will look more deeply at your needs. PNC is consistently ranked in the top five real estate loan syndication businesses in the U.S. and manages, as Administrative Agent, over 500 syndicated lending relationships totaling approximately $70 billion in commitments. We look forward to the opportunity to work with you on your next large loan.
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