To Club or Not to Club

Syndicated Loans

Lenders today are more focused than ever on the development of a full banking relationship with their customers. Materially increased regulatory costs and an extended period of low interest rates have made ancillary product and service revenue a big driver of credit extension decisions. The result is that fewer and fewer lenders are willing to be simply “buyers of paper” in the syndicated market and, in order to fill out their loan syndicates, borrowers must lean on existing relationships. When a non-relationship lender is needed, borrowers find that they must demonstrate the possibility of a full banking relationship, often tangibly and in advance of a commitment to the syndication! 

In the past, we have discussed the complexity involved in deciding how to structure the syndication of a large loan in today’s lending environment. Whether it is fully underwritten transactions vs. best-efforts arrangements or single vs. multiple agent banks, each decision involves trade-offs that impact the optimal execution strategy for a given transaction. These solutions, however, pre-suppose that a traditional syndication is actually needed. In light of the earlier discussion, pre-2008 style underwritings have become increasingly rare and we have seen the impact on the best-efforts market of a growing reliance on relationship lenders. Increasingly, borrowers are asking themselves (and their agent banks) if there is an alternative syndication model that better reflects today’s “new reality.” 

Simply put, borrowers want to know: Should I just “club” my deal and forgo a true agented syndication? The answer is that you should factor in all considerations concerning both your banking relationship strategy AND the contemplated transaction. Some questions to ask include:

  1. How will communications be handled during the underwriting of the loan? Lenders will need a steady flow of due diligence information and an ability to have questions answered while they complete their underwriting. As the number of lenders increases, the coordination of this process will become more burdensome on the borrower.
  2. How will market levels of key loan points be determined? The bidding process will confirm, to a greater or lesser extent, the appropriate market levels for a syndicated loan; however, the proper starting place for a request can influence the bidding behavior of lenders. Also, lenders bidding as an agent will tend to keep terms and conditions closer to market in order to increase the likelihood of a successful distribution.
  3. How simple is the execution of this loan? Larger loans requiring more lenders, loans with off-market terms or loans with unusual complexity or risk can require special attention to distribute. As these issues become more of a factor in your syndication, it can be helpful to have the additional sponsorship and banking expertise provided by an agent.
  4. What is the current state of my banking relationships? Borrowers are best positioned to assess the extent of the revenue relationship with their banks; however, an agent bank can be a helpful third party in determining a lender’s satisfaction with the existing relationship and how that lender is currently engaging with the market (commitment levels, types of transactions, etc.), which can be predictive of expected behavior.
  5. How will decisions be made and disputes resolved? Decisions and disputes are controlled in a syndication primarily by vote according to commitment percentage. Certain administrative decisions, especially in construction loans, are made at the discretion of the administrative agent. A strong relationship lender or lenders acting in an agent capacity may have a broader perspective through which they make these kinds of decisions. Often that can mean the difference between a successful and an unsuccessful vote.
  6. How can I manage my lending relationships most effectively? As strange as it may sound, a purely egalitarian approach to managing lending relationships can have unintended consequences. Lenders often prefer to represent, internally and externally, that they were the lead on a given transaction. Setting up a club syndication where all lenders are treated equally may have the perverse effect of communicating that none are special. Many borrowers have had success in rotating agency roles (and fees), thus allowing each lender to get its fair share of “wins.”

Choosing a strategy
Given these considerations, what is the right strategy — a traditional agented syndication or a club? The best place to start answering these questions is with your PNC Real Estate relationship manager. He or she 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 United States[1] and manages, as administrative agent, more than 650 syndicated loans totaling approximately $70 billion in commitments. We look forward to the opportunity to work with you on your next large loan.