What is a Syndicated Loan?
A syndicated loan is a loan made by a group of lenders who share or participate in a specific loan given to a project.
How Does a Syndicated Loan Work?
A project may require too large a loan for a single lender or require a special type of investor or lender with expertise in a particular asset class. For example, a transportation project, such as a high speed rail, may involve a group of investors and lenders, each specializing in a portion of the project, such as rail lines, cars, bridges and tunnels, and signal and control technologies. The whole group is referred to as a syndicate.
Not only do the various lenders or investors bring their own expertise to the project, but they also spread the risk among themselves without joint liability, especially among very large, complicated projects. In addition, they enable lenders to handle projects that may exceed their individual capital base.
Why Does a Syndicated Loan Matter?
A syndicated loan is usually put together by a lead lender or agent who pulls the other lenders together and handles the loan management and servicing. The lead bank usually charges a fee for handling these activities.
Before the subprime lending crisis, loan syndication was a popular way to have multiple lenders participate in a small 'slices' of complex and large loan obligations, with limited direct collateral obligations to back up the syndicates. Those practices have been reduced considerable and are subject to increasing scrutiny and regulation. At the same time, syndicated loans are still an important and effective method of financing large, complicated and credit-worthy project.