LOAN SYNDICATION

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Master of Commerce – M.Com First Year Solved Assignments for July 2019 and January 2020 Admission Cycles

M.COM First Year Tutor Marked Solved Assignment

Course Code: IBO – 06
Course Title: International Marketing Logistics
Assignment Code: IBO-06/TMA/2019-20
Coverage: All Blocks

IBO – 06 International Business Finance Solved Assignment for 2019-20

Q1.) (a.) What is loan syndication? Explain the process of loan syndication.

Ans: Loan syndication is the process of involving a group of lenders in funding various portions of a loan for a single borrower. Loan syndication most often occurs when a borrower requires an amount too large for a single lender to provide or when the loan is outside the scope of the lender's risk-exposure levels. Thus, multiple lenders form a syndicate to provide the borrower with the requested capital.

Process of loan syndication:

Broadly there are three stages in syndication, viz., Pre-mandate phase, Placing the loan & disbursement, and Post-closure stage.

1.) PRE-MANDATE STAGE: This is initiated by the prospective borrower. It may liaise with a single bank or it may invite competitor's bids from a number of banks. The borrower has to mandate the lead bank, and the underwriting bank, if desired. Once the lead bank is selected and mandated by the borrower, the lead bank has to undertake the appraisal process. The lead banks need to identify the needs of the borrower, design an appropriate loan structure, and develop a persuasive credit proposal.

2.) PLACING THE LOAN AND DISBURSEMENT: At this stage, the lead bank can start to sell the loan in the marketplace i.e. to prospective participating banks, this means that the lead bank needs to prepare an information memorandum, prepare a term sheet, prepare legal documentation, approach selected banks and invite participation. A series of negotiations with the borrower are undertaken if prospective participants raise concerns.

To conclude this stage the lead bank must achieve the closing of the syndication, including singing. If needed, underwriting the bank has to sign the balance portion of the loan.

The loan is disbursed in phases as agreed in the loan contract. The loan is disbursed in a 'non-lien' account i.e. a bank account created exclusively to disburse the loan. This account and its withdrawal are monitored by banks. This is to ensure that the loan is used only for the purpose defined in the loan agreement and that the funds are not diverted to any other purpose.

3.) POST-CLOSURE STAGE: This is the monitoring and follow-up phase. It has many times done through an escrow account. The escrow account is the account in which the borrower has to deposit its revenues and the agent ensures that the loan repayment is given due priority before payments to any other parties. Hence in this stage, the agent handles the day-to-day running of the loan facility.