Managing risk with a syndicated loan

As you’re planning your growth strategy, you may realize you’ve come to the point where your lending needs have changed. While you’ve probably become accustomed to dealing with one bank, you’ve grown your business and you also have to manage your risk. In certain instances, a company’s requirements for bank financing may well exceed a single financial institution’s ability to accommodate them.

Just as diversifying your customer base is a key to growth, expanding the number of financial service providers may well have very positive implications for achieving medium and long-term goals

That doesn’t mean your bank has lost faith in your business, rather mitigating the risk your business is exposed to when funding sources are concentrated with a single partner. Just as diversifying your customer base is a key to growth, relying on a single source of capital no longer makes sense once you’ve reached a certain level.

That’s where a syndicated loan comes in.

The advantages of loan syndication include:

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  Access to larger-scale financing

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  Diversification of your financing sources, enabling you to create new banking contacts

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  Market-relevant pricing and structure

In almost every scenario, your business will find access to more capital under a syndicated loan and once in place, a syndicated loan is easily scalable to support your company’s growth plans.

A syndicated loan is a loan provided to a single borrower by a group of lenders (known as a syndicate). Typically, one bank acts as the administrative agent, referred to as the lead bank, serving as the facilitator between the borrower and the other lenders.

The lead bank makes sure it’s targeting the right lenders—ideally, other banks that understand your industry and want to work with your company. The process begins with a discussion with you about the right mix of banks and the amount of capital each bank will provide.

As you would in a traditional loan, you and the lead bank will come to an agreement on the terms and conditions (the amount, pricing, structure, types of facilities, tenor, and covenants).

The lead bank coordinates communication with the other banks using a secure database to provide a copy of the term sheet, background information on your company and its operations, and financial data. While other banks have been engaged, it should still feel as if you’re working with one bank.

The process takes a minimum of six weeks, including every other party getting credit approval and documenting the transaction.

When you’ve made the move to a syndicated facility, you’ll likely need to upgrade your legal and accounting teams, as the legal documents and need for audited financial statements are more comprehensive than you probably experienced with a traditional term loan from a single bank.

The credit documentation process is more costly than a single-bank loan too. This process can be more granular because: a) there are simply more banks involved; and b) you may have to educate new lenders about the company’s operations, its financials, and the industry in which it operates.

Also, as a growing, dynamic company, changes to your situation that could impact your syndicated loan agreement are likely to arise

These changes could materially impact your organization’s finances and therefore may require approval from the syndicate. Even after closing, decisions require more lead time given that more banks are involved, there are reporting requirements, and the timelines established in the loan agreement are binding.

It’s also important to understand that some factors are out of the lead banker’s control. While the lead bank may agree with your request and put it forward to the bank group, at the end of the day the entire syndicate (via majority or unanimous vote) must agree with the request. That’s why it’s important to come to the lead bank early in the process if you’re considering anything that could impact the terms and conditions of the loan agreement.

There’s no magic number to determine whether a loan would go into syndication. And the successful transition from a single bank deal to a syndicated one is a function of several key variables, including:

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  The overall structure of the transaction including pricing, leverage, security, term, security, loan documentation)

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  The quality of the information provided to the bank group in the assessment phase

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  The willingness of ownership or management to make themselves available to tell their story and assist in answering questions form the bank group

If syndication is the right way to go, make sure the terms of the syndicated loan are in line with your long-term plans. Also consider that the right time to have the initial discussion is much earlier than the actual need—probably three to six months in advance of when you’d need a loan. This is especially important in advance of a transformational transaction.

A syndicated loan is a fundamental change to your lending relationship and lending needs. But it’s also a positive indicator of your growth trajectory. In 2021, according to Refinitiv, Bank of Montreal agented the most number of transactions of all of the Canadian banks, demonstrating our leadership, client satisfaction and winning culture.