Introduction to Syndicate Lending

A syndicated credit is usually a large facility made to a borrower or borrowers by a group of banks headed by a lead bank that usually takes a percentage of the facility itself, syndicating the rest to other banks and financial institutions. The credit could be fund based or non-fund based. Syndicating loans or spreading debt among a number of investors helps lenders manage their portfolios by reducing risk, improving returns and increasing fee business. A syndicated facility is typically structured and priced by the lead arranger or agent, who then sells portions of the deal to other lenders or investor groups under terms negotiated by the agent.

Syndication clearly has become more complex over the last several decades. In addition to commercial banks and financial institutions, today's investors include finance companies, insurance companies, securities firms etc., with commercial banks and financial institutions remaining as the largest investor category. With diverse investor base it is often required that the facility is structured to meet the needs of the market. Often structuring involves revolvers (short term facility) and term loans (long term facility) with the investors being different for these two segments.

The Syndicated Lending (SL) module has been designed keeping in view the complex facility structures prevailing in the market and the need for automated administration of such facilities with flexibility, which is a key feature of Temenos Transact.

The module automates the business of administering syndicated facilities where the bank is either the lead manager, lead participant, agent or a mere participant. It handles basic to complex multi-lender, multi-tranche, multi-product, multi-currency, and multi-borrower facilities from application stage to maturity, based on workflow approach with rigorous condition checking.

The system handles the workflow in the following stages:

• Pre-Syndication: This stage starts with recording terms of mandate and culminates with recording the final terms of the credit agreement. Information that may be recorded includes the nature of facility sought, details of banks to which information memorandum is circulated and their response, details of underwriters with underwriting fee, participators brought in by each underwriter, details of final allotment to participants with the commitment fee at participant level. Collection and distribution of underwriting fee and accounting for underwriting, if required, is also handled at this stage.
• Facility: This is a line of credit or a facility granted to the borrower. The administration of the facility is broadly based on its product type, nature of credit (revolving or non-revolving), tenor and the currency of the facility. Method of calculation of commitment fee and its collection frequency is defined in this stage. Tranches may be defined under a facility to phase out disbursements, with each tranche having its own set of terms and conditions for draw down management.
• Drawing: This is a draw down against a facility. Multiple loans may be drawn down against a facility until the facility is fully utilized. Features such as default of interest rates from facility, rollover/merger/split of loans are also available. Apart from the above, interim events that are supported by the system include rollover/merger/splitting of loans, loan trading etc.
• Pay off Priority: System allows to payoff individual investors from the predefined % split. Payoff priority is set at contract level. Changes in payoff priority will result in a new syndication contract creation and consequently changing the linkage from loan arrangement as well (i.e. no changes on payoff priority can be made once syndication agreement is created). In case of payoff priority is not set then standard % split applies. Payoff priority is applicable only to early principal repayment and it includes total principal (including principal due and overdue principal). Regular monthly payments (principal & interest) follows only standard predefined % split. Priority can be set on a non-exclusive basis: system shall perform an equal split of principal repayment between same priority level participants.
• Deriving accounts of revolving and non-revolving loans: Financial Institution will define Contra entries Internal Accounts by lending products and based on revolving and non-revolving loans.
• Different Interest Rates to the SL Participants: Syndicated loan agreement are defined with different interest rate for lead bank and different interest rate for each participants. While making the repayment to participants, interest amount is calculated on each participant’s Interest percentage.
• Bill Adjustments: (Applicable when FI is a participant in a syndication). When FI acts as Participant, the payment calculated in Temenos Transact for its portion will be adjusted to match the amount received from the lead bank. This will eliminate differences created for interest calculation methods and/or rounding differences.
• Cap Amount Limitation by Company: Ability to define a Cap or Maximum amount by company for lending syndicated loans. Syndicated loan offering more the CAP amount will throw a warning message to the user.
• Fixed or Floating rate of Interest for syndicated loans: Interest on syndicated loans can be applied on fixed or floating rate basis or periodic rate basis. Supports margin for floating rates and periodic rates.
• SL Balance adjustment and write-off: FI has an ability to adjust loan balance and write-off the loan when the loan amount is not paid by the customer for a specific period of time. This will update the SL details table and raise accounting entries for each participants.

Click here to understand the terms and abbreviations used in this module.