2. Loan Syndication – An Overview (2024)

This chapter contains the following sections:

• Section 2.1, "Loan Syndication"

2.1 Loan Syndication

The Loan Syndication modules of Oracle FLEXCUBE address loan operationsof a bank or a financial institution that enters into loan syndicationcontracts with borrowing customers (borrowers).

The loan syndication modules are the Syndication Facility (FC), SyndicationBorrower (LB) and Syndication Participant (LP) modules.

A syndication agreement is reached between a borrower and a bank (ora financial institution), which arranges the syndication. The arrangerbank identifies one or more banks or financial institutions that poolfunds to meet the borrowing requirements. These banks or institutionsare known as participants.

The arranger bank actually disburses the loan, after receiving thecontributions of the other participants. The participants in the syndicationshare the interest and other income accruing from the loan, in the ratioof their participation that was agreed upon at the time of drawing upthe loan syndication agreement.

2.1.1 The Process of Disbursing a Syndicated Loan

The process in which the loan is disbursed (or the customer availsthe loan) under a syndication agreement depends upon many factors. Themost important factor is the nature of the requirement of the customer.The other factor is the identification of the participants who wouldshare the load of funding the borrowing.

The customer could choose to avail the loan:

• Either entirely, in one installment, or borrow a fixed installmentamount at a desired frequency, over a specified tenor
• The syndication agreement may provide for different interest application,calculation, and collection methods for each of the installments
• In addtion, it can provide for revolving or non-revolving commitmentswhile availing the installments
• The identification of the participants who would share the load ofmeeting the borrowing requirements depends upon all these factors.
• Accordingly, it is possible, due to the nature of the borrowing requirement,
• That a different set of participants may be identified to share thefunding, for each installment of loan principal borrowed
• However, the same set of participants can also fund each installmentin different ratios, if so dictated by the nature of the borrowing requirement.

2.1.2 Tranches

Each installment of the syndicated loan that is made available tothe borrower is funded by a set of participants. Each such installmentis known as a tranche. Therefore, under a tranche, a specified portion(or the entire amount, depending upon the arrangement) of the total loanis made available to the borrower.

The tranche takes the form of a commitment on the part of each ofthe participants to grant, in principle, the provision of funds for theamount being made available under the tranche. It also involves a commitmenton the part of the customer to avail the funds made available under thetranche.

When the terms of a tranche are finalized, the schedules for the actualloans to be made available to the customer under the tranche are alsofinalized, according to the requirement of the borrower. The participantsare directed to fulfil their commitments whenever a schedule is due.

2.1.3 DrawDowns

When the commitments are fulfilled, the borrower may avail the fundsmade available under a tranche as drawdown loans. Depending upon therequirement, the borrower may avail of the tranche amount in a specifiednumber of drawdown loans. These loans may have a term or tenor that isindependent of the tranche tenor.

The tenor of the drawdown loans falls within the period between thestart date and the end date of the main syndication contract. In addition,the tenor of the drawdown loans begins within the tenor of the tranche.

Therefore, the main borrowing requirement (or total principal) ina syndication contract may be disbursed to the borrower through one ormany tranches (installments), and each tranche may be split down intoa specified number of drawdown loans. A tranche amount could also bedisbursed through a single drawdown loan, if so required by the borrower.

This chapter explains each of the features of the Loan Syndicationmodule of Oracle FLEXCUBE, enabling you to understand how you can usethe system to process syndicated loans.

The following example illustrates the concept of loan syndication:

Example

The syndication contract

Your bank offers the facility of entering into syndication contractswith customers who request loans. You have identified other banks orfinancial institutions for the purpose of pooling in resources to meetthe borrowing requirements of the loan syndication contract.

One of your customers, Mr. Chad Jacobs, has approached you for a loanof 200,000 USD on 1st June 2000. You enter into a syndication contractwith him on the same date, with a view to meeting his funding requirementby identifying other banks or institutions that can share the load offunding. The agreement is entered into on 1st June 2000, and the enddate, by which all components of the borrowed amount will be repaid,is 1st June 2001.

Mr. Chad Jacobs’ borrowing requirement is as follows:

• Total syndicated loan principal: 200000 USD, in two tranches witha total tenor of six months.
• Portion of loan desired in the first tranche: 100,000 USD. Mr. Jacobdesires to completely avail of this first tranche amount in the followingpattern:

1. 30,000 USD on 30th June
2. 35,000 USD on 31st July
3. 35,000 USD on 31st August

Portion of loan desired in the next tranche: 100,000 USD Mr. Jacobdesires to completely avail of this first tranche amount in the followingpattern:

1. 30,000 USD on 30th September
2. 35,000 USD on 31st October
3. 35000 USD on 30th November

In addition, the details of interest applicable on each tranche isas follows:

• For the first tranche, Mr. Jacobs desires interest to be appliedas a fixed rate of 5%, and collected as bearing.
• For the second tranche, he desires interest to be applied as a floatingrate.

Tranches

Mr. Chad Jacobs’ syndicated loan is therefore required to bedisbursed in two different sets of tranches, as seen above.

The syndication contract also involves a ‘commitment’from Mr. Chad Jacobs as the borrowing customer, as well as from willingparticipants who undertake to meet the borrowing requirement, and todisburse the loan after pooling together resources.

For the first installment, wherein an installment principal of 100000USD is to be lent at 5% fixed rate of interest, your bank has now identifiedFargo Eastern Bank and Gold Crest Commercial Bank as potential sourcesfrom whom funding may be obtained, to meet Mr. Chad’s borrowingrequirement. The funding load is proposed to be shared in the followingpattern, which is known as the ratio of participation:

• Your bank (Participant) : 30000 USD
• Fargo Eastern Bank (Participant) : 35000 USD
• Gold Crest Commercial Bank (Participant) : 35000 USD

The ratio of participation could also be expressed through percentages. Each of the participants enters into a commitment contract, pledgingto provide the portion of funds agreed upon by them.

Since the first installment set is required to be made available accordingto the schedule falling between 1st June and 31st August, the participantsare reminded to fulfill their commitments just before each schedule isdue. This would mean that the approved contributions from each participantwould be credited into a common syndication pool before each scheduleis due. The schedule dates, according to the agreement, are 30th June,31st July and 31st August.

This arrangement, wherein the participants commit to provide the fundingas per their pledge, and then proceed to fulfill their commitment, isknown as a tranche. It is under the auspices of a tranche that the principalof the syndicated loan amount is actually made available to the customer.

The tenor of each of the commitment contracts with the participantswould be, in the case of the first tranche as given above, three months.

Let us suppose that the value date of the tranche contracts with eachparticipant is 1st June 2000. The approved contributions would then needto be credited into a common syndication pool, in the mutually agreedratio, before each schedule date, i.e., before 30th June 2000, before31st July and before 31st August.

The above arrangement (for the first tranche) meets the borrowingrequirement of the first installment. To meet the remaining portionof the requirement wherein an installment principal of 100000 USD islent at floating interest rates, your bank has identified North AmericanOverseas Bank and Banco Italia as funding partners. The ratio of participationis finalized as follows:

• Your bank 25000 USD
• North American Overseas Bank 40000 USD
• Banco Italia 35000 USD

Again, each of the participants enters into a commitment contract,committing to provide their portion of funds as agreed. This arrangementforms the second tranche under the syndication contract.

Since the second installment set is required to be made availableaccording to the schedule falling between 1st September and 30th November,the participants are reminded to fulfill their commitments just beforeeach schedule is due. This would mean that the approved contributionsfrom each participant would be credited into a common syndication poolbefore each schedule is due. The schedule dates, according to the agreement,are 30th September, 31st October and 30th November.

The tenor of each of the commitment contracts with the participantswould be, in the case of the second tranche as given above, three months.

Mr. Chad Jacobs’ requirement of 200000 USD under the syndicationcontract has now been mobilized under two separate tranches, with themain players as follows:

Therefore, the borrowing requirement in a syndication contract canbe realized in as many tranches as required. Each tranche have the borrowingcustomer, and may have either common or different participants. In addition,each of the players in a tranche is under a commitment contract to fulfilltheir portion of the ratio of participation.

Draw Downs

To recall, the schedule defined for the actual loans to be made availableto Mr. Chad Jacobs’ according to his borrowing requirement underthe contract is as follows:

Tranche One:

• 30000 USD on 30th June
• 35000 USD on 31st July
• 35000 USD on 31st August

Tranche Two

• 30000 USD on 30th September
• 35000 USD on 31st October
• 35000 USD on 30th November

This means that either on 30th June or any date following it, up to31st July, Mr. Jacobs can avail his first loan under the syndicationcontract, to the tune of 30000 USD, which is made available to him undertranche one.

Similarly, either on 31st July or any date following it, up to 31stAugust, Mr. Jacobs can avail his second loan under the syndication contract,to the tune of 35000 USD, which is made available to him under trancheone.

Therefore, Mr. Jacobs is given the opportunity, according to the schedule,to avail of the portion of the total loan amount made available undereach tranche, in a specified number of loans. Each of these loans iscalled a drawdown loan.

Therefore, according to the schedule, the drawdown loans availed byMr. Jacobs under the syndication contract, and under each tranche, couldbe as follows:

Value Date of the Syndication Contract: 1st June 2000

Each of the drawdown loans can have independent life cycles and differenttenors. However, all six drawdown loans must mature before the end dateof the syndication contract, which is 31st June 2001.

Each of the participants in a tranche will share the interest incomederived from any loans availed by Mr. Chad Jacobs under the syndicationcontract.

In this manner, your bank has fulfilled Mr. Chad Jacobs’ borrowingrequirement under the syndication contract dated 1st June 2000.

2.1.4 Swing Lines

A borrower requests for a participant to get certain amount of drawdownpayment. In some cases, there could be delay of 1-2 days in between theborrower request for a drawdown and the actual disbursem*nt from theparticipants. The reason for delay could be on account of documentation,legal formalities, and so on.

In case the borrower urgently requires the funds, the borrower canavail the funds immediately using a Swing Line. The swing line has thefollowing features:

• Swing line is nothing but an ad-hoc line that is available from participantsto borrower as a short term measure.
• For a participant, the swing line limit should not cross the shareamount of the participant in the tranche.
• All the swing amounts (In case there is more than one participant)should be disbursed on the same day. In case of multiple swing line days,new drawdown should be entered for each of the swing line date basedon the participants for the swing line for that day.
• System does not ensure the closure of the swing line drawdown, beforethe initiation of regular drawdown as there is no linkage between theswing line and the regular drawdown. This has to be operationally controlled.
• You are not allowed to do rollover for swing line contracts
• Swing line drawdown is allowed only for normal and bearing contracts

2.1.5 Defining Products

In Oracle FLEXCUBE, any service or scheme that you want to make availableto your customers can be defined as a product. For instance, your bankmay be entering into lending agreements with other lending banks, todisburse loan requests as a syndicate. This facility of disbursing syndicatedloans can be defined as a product.

Going further, your bank could be offering borrowing customers loansthrough any tranche of a syndication contract framework. To recall, atranche is a channel through which a borrowing customer could receivethe required loan as a drawdown. This facility that you want to offerto your customers, of availing loans through a ‘tranche’arm of the syndicate agreement, could also be defined as a tranche product.

Defining products simplifies the task of disbursing syndicated loans.Typically, you would need to specify the following information abouta tranche product each time you process a drawdown under the tranche:

• The preferences with regard to interest applicable
• The payment schedules
• The liquidation schedules for ICCF components

You can define a product with all the specifications listed above.Each time you enter a drawdown under the product into Oracle FLEXCUBE,they are automatically applied to it, and you need not specify them new.

In Oracle FLEXCUBE, you can define two levels of products for syndicationcontracts:

• The main syndication product. This level establishes a blueprintfor capturing details for all syndication contracts
• The tranche and drawdown level products. This level enables you tocapture details for all tranches under a syndication contract, as wellas the draw downs under each tranche.

2.1.6 Processing Tranche or Draw Down Contracts

Oracle FLEXCUBE processes syndication contracts by allowing you tocapture contracts at both the tranche level as well as the drawdown levelunder a tranche.

2.1.6.1 Processing Tranche

When you open a tranche under a syndication contract, you input acommitment contract for the borrowing customer. Based on this, the systemcreates a commitment contract for each of the participants.

The borrower tranche contract involves the borrower tranche productthat you have defined. The participant commitment contracts involve theparticipant commitment products you have defined.

Though the tranche contracts may involve different products, all thecontracts involved in a particular tranche are processed simultaneously.

The tranche contracts may be revolving or non-revolving, accordingto the requirement of the borrower. In a revolving commitment, the commitmentamount is reinstated when it is fulfilled. Therefore, the commitmentamount pledged to a borrower is reinstated once the drawdown loan availedhas been repaid by the borrower. If the commitment is non-revolving,the commitment amount is not reinstated on repayment of the drawdownloan availed.

2.1.6.2 Processing Drawdown

After a tranche comes into effect (that is, on and after the valuedate of the borrower tranche contract), the drawdown loan contract forthe borrower can be entered into the system.

When you input a drawdown for the borrowing customer under a tranche,the system creates a contract for each of the participants involved.

The borrower drawdown loan contract involves the borrower drawdownloan product that you have defined. The participant contracts involvethe participant products you have defined.

2.1.7 Processing Repayments

Repayments as well as interest payments on a borrower drawdown loanare distributed to the participants.

A common loan syndication pool is maintained to which contributionstowards the borrower loan principal would be credited, and from whichthe borrower avails drawdown loans. Repayments of principal are alsocredited into this common syndication pool, from where they are distributedto the participant nostro accounts.

A common loan syndication interest pool is maintained to which repaymentsof interest due on the loans are credited. From this pool, the interestdue to each participant is distributed to the participant nostro accounts.

You can maintain a GL in Oracle FLEXCUBE that would serve the purposeof a common syndication pool, as well as another to serve the purposeof a loan syndication interest pool. These GL’s are known as BridgeGL’s.

2.1.8 Sharing of Fee or Charge Income

The participants share income from the liquidation of charges or feesthat are applicable to borrower contracts, according to the ratio ofparticipation agreed upon when the syndication contract is drawn up.

You can liquidate these charges or fees online in Oracle FLEXCUBEand apportion the liquidated fee income to the participants, net of tax.