When the loan requirements for a borrower exceed the capacity of a single lender, a syndicated loan, whereby multiple lenders can contribute to the fulfillment of the borrower’s request, could be the answer. At the same time, engagement of a single lender, termed the agent bank, may be needed to deliver a full commitment or even to close the entire loan prior to inviting additional lenders.

Borrowers may seek this type of “underwriting” when certainty and/or speed of closing is essential. Acquisitions that must close by a certain date and commercial construction projects that have tight delivery timelines are good examples of situations in which an underwriting may represent the best execution.

If an agent bank agrees to fully underwrite a syndicated loan, it takes the risk that the loan can’t be sold to other lenders in an amount sufficient to reduce its final loan position in an amount equal to or below its approved hold. In exchange for this risk, an agent bank will charge larger fees than it would as a single bank lender or even when arranging the loan on a best-efforts basis. The larger the risk, the larger the fee. You may ask yourself, “How much larger?” The answer is, of course, that depends.

When an agent sells an underwritten loan, it pays a closing fee to each purchasing lender out of its own upfront underwriting fee. The revenue generated by realizing the difference between the underwriting fee and the closing fee paid to participants compensates the agent for the work of arranging participants and taking on the risk of holding an outsized portion of the loan. That revenue also provides a cushion in the event that participant lenders require more fees than expected to purchase a portion of the loan. If the agent believes that lenders are likely to ask for larger closing fees, it will increase the underwriting fee in order to increase the cushion.

Borrowers who are not forced to consider an underwritten deal because of a need for quick or certain proceeds will want to evaluate a number of deal- and sponsor-specific factors to determine whether the costs of an underwriting justify the benefits.

Among the Issues to Consider Are:

  1. How broad and deep are my lending relationships? The surest path to generating participant interest in a syndicated loan today is to mine existing relationships. Lenders are saving capital for the development and protection of current clients and can be reluctant to support new borrowing relationships without meaningful economic enticement.
  2. How large is my loan? The larger the loan, the more lenders are required and the greater the likelihood that the marginal dollar is a pricey one.
  3. How close to “market” is my loan structure and spread? As loans stray further from market norms, the probability that lenders will demand increased compensation becomes greater, putting underwriting fee cushions in jeopardy.
  4. How quickly will I require closing and funding of my loan? Agent banks manage risk, in part, by engaging in an orderly sales process to other lenders and by working hard to sell excess exposure as soon as possible — ideally prior to the funding of the loan. When the time between the closing of the loan and the sale of the loan grows longer, the chance that a market disruption could occur and change the desirability of the loan increases.

Choosing a Strategy

These are just a few considerations to weigh when choosing an underwriting, and there are numerous ways to manage the associated risks. So, how should you approach your specific situation? How should you balance cost and convenience?

The best place to start answering these questions is with your PNC Real Estate Relationship Manager or Loan Officer. 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.