Companies with large capital needs often employ a commercial banking relationship that includes a syndicated bank loan — a commercial loan that is provided by multiple banks (a bank group), where one bank acts as the lead arranger and administrative agent for the bank group. A company’s bank group can be as small as two or three banks, or, depending on the size of its credit facilities, can be much larger to include dozens of banks. Over the last 15 years, syndicated bank loans have become the dominant way for companies to finance their capital needs.
“Despite what you hear about banks not lending, 2011 was a record year for syndicated multi-bank loan financing, topping $1.8 trillion,” says Ron Majka, senior vice president and manager of loan syndications for FirstMerit Bank. “The syndicated loan market is very healthy and active, and local banks in Northeast Ohio are hungry to support healthy growing companies.”
Smart Business learned more from Majka about multi-bank loan syndications and how to tell if it could benefit your company.
What types of companies could benefit from considering a multi-bank loan syndication?
The need for a syndicated bank loan is often event-driven. Frequent triggering events include the financing of mergers and acquisitions (M&A), new construction associated with corporate expansions, large equipment purchases, or dividends to owners (referred to as leveraged recapitalizations). In addition to event-driven situations, the need for a syndicated bank loan sometimes can be more evolutionary. As companies reach a certain size, they may outgrow a singular relationship with one bank. Moving to a larger, syndicated multi-bank credit facility is a natural next step for these companies.
Why are loan syndications becoming so popular?
Multi-bank syndicated loans are popular because they are the most flexible and economic financing alternative available to companies. Other methods of raising large amounts of capital include going public through the sale of stock, issuing bonds, or attracting investors through a private placement. Each of these options is much more expensive, and not nearly as standardized and flexible as bank loans. From a banking perspective, nearly every bank that is active in commercial lending is involved in some level of providing syndicated loans. Together, these factors contribute to the amount of multi-bank syndicated loans issued -— now exceeding $1 trillion per year.
How can loan syndication benefit a company?
Having an optimal credit facility is a crucial component to the long-term success of a company. A syndicated loan sets the platform for a company’s growth. A simple two-bank syndicated loan facility can be very easily expanded to accommodate increased loan amounts and additional banks, to complement a company’s growth needs. Another benefit of loan syndication is that a company can tailor a bank group that fits its specific corporate strategy and needs. For example, a Northeast Ohio company that is engaged in international business may choose a strong local agent bank that provides stable, trusted leadership. That agent bank might then add an international bank to the bank group to help provide overseas trade and banking needs for that company. Also, competition is always a good thing. Having multiple banks involved in competition is a way to make sure the client is always getting the best execution, and that its banking terms and structure are most favorable.
How can a company choose the right agent bank to lead the loan syndication?
It’s important to put a lot of thought into whom you are entrusting as your agent bank. Bigger isn’t always better, nor is it wise to adopt a cookie-cutter approach. You want an agent who understands your business, takes the time to fully comprehend your company’s strategy and growth plans, and then crafts a financing arrangement that helps you achieve those goals. Choose a bank where you will have an experienced group that is solely dedicated to structuring, leading, and administering multi-bank syndicated loans. Lastly, any successful relationship is a two-way street. Make sure you are comfortable with your agent bank’s culture, strategy, leadership, health and stability. This relationship is very important.
How does the process of issuing a syndicated loan work?
It is typically a five- to eight-week process from start to finish. First, it involves choosing the right agent bank. Next, the company works with the agent bank to craft the right strategy to produce the kind of bank group it wants to achieve. For instance, you may have a number of questions to consider. Do you want international or local banks as part of your bank group? Are you interested in banks that are active in or have expertise in your industry? Should you just include those banks you are familiar with? Or, are there banks that you do not know that can add value to your bank group? Once you determine your optimal bank group, the agent bank will use its knowledge of the marketplace to approach and attract the right partners.
The process also includes the agent bank and the company working together to create materials that fully describe the company’s business, philosophy, industry and corporate plans. That package of material, called a confidential information memorandum, is a 25- to 100-page document that includes a complete assessment of the company and its operations. Once everything is set, the opportunity is launched to the bank market and the agent bank works with the targeted banks and the company to answer questions and move those banks through their credit approvals. This process ultimately culminates in a successful closing and funding of the company’s multi-bank syndicated credit facility.
Ron Majka is a senior vice president and manager, loan syndications for FirstMerit Bank. Reach him at (330) 996-6446 or email@example.com.