Investment Banking - Loan Syndication & Forefaiting

LOAN SYNDICATIONS: Meaning

Loan Syndication is a pocess of pooling of money from the different lenders and lent it to the large borrowers who need large capital.

Baisically,In loan syndication  may borrowers grant loan to any big borrower who need large capital where any single borrower is unable to provide this large capital.

Loan Syndication is mostly use in large scale transactions mostly in any types of merger and acquisition,Buyout ect,where there is requirements of huge capital to close the deal.

Roles within Syndication Process:

1.Arranger/ Lead Manager:The roles of arrangers is to arrange the funds for the borrowers.They are also responsible for placing the syndicated loans with other banks and ensuring that syndication is fully subscribed.They charge the arrangement fee for there services.

2.Underwriting Banks:These Banks commit to supply funds to the Borrowers,if necessarly for it's own resources if the full loans are not arranged or subscribed.Underwriter may be the arranging bank or another bank who take resposibility for providing this facility.There is also the risk involved to the underwriter if loans is not fully subscribed.

3.Participating Banks:Thes are the Banks which participate in the syndication process by lending a portion of the total amount required.These banks charge the interest on the loans given,also charging participating fees.

These Banks involve the risk of not recovering debts if borrowers get default.

4.Facility Manager/Agent:The main role of facility manager is arrange the administrative facilities over the term of loans.The facilities are in the forms of disbursement,repayments,compliances ect.Facility manager may be the arranging and underwriting banks.

 Benefits to the Leads Bankers:

1.Leads bankers have good links to arrange the fund,so they can earn fees in retun of giving there services without investing capital.

2.By giving there services leand bankers should enhance the it's reputation.

3.By providing services helps Banks to enhance there relationship with clients.

Benefits to the Paticipating banks:

1.Loan syndications helps participating banks to access to the lending opportunities at low marketing costs.

2.Once they participate in current loan syndications then there are the chances for them to participate the future syndications.

3.Participating banks have low risk as compare to the bank which dominate the high leverage over them.

 Benefits to Borrowers:

1.Loan syndication system helps borrowers to deals with single banks for raising high value loans.

2.Loan syndication process is simple and quikers than other ways of raising capitals.

Stages of Loan Syndications:

1.Pre Manadate Phases:In this phase prospective borrowers are approach to the single banks or the are invite competitive bids from numbers of banks.In this phase lead bankers identify numbers of borrowers,Designed and appropriate loan structure,Developed a persuasive credit proposal and Obtain internal approvals.

2.Placing the Loans:In this phase the leads managers are start selling the loans in marketplace.In this phase the lead banks prepare the informal memorandum,prepare a term sheet,prepare legal documentations,Approache selected banks and invite participations.

3.Post closer phase:In this phases the agent now handles the day to day running of the loan facilities.

Pricing in Loan Syndication:
1.Banks which provide Loan syndication facilities charge fees for front end activities.These may be  Arrengements and Underwriters fees.
2.Banks providing bulk loan would charge interest on them.This would be margin over base rate.
3.Banks also charge commitment fees for availability of funds.
4.Banks providing loan syndication facilities charge agency fees for managing administrative activities during the term of loans.

Documentations involved in Loan Syndication:
1.The providing Loan Syndication facilities should appoint specialized lawyers working closely with  all banks/party involved in syndication process.
2.Roles of each party is pre determined in documents,related to there duties and regulations.

FORFAITING:
It is a export finance mechanism for converting export credit sales into cash.
In this concept exporter sells it's recievables to the forfaiter at discounted rate,in return exporter get cash.All the risk associate related to the collecting of recievable are bear by forfaiter.

Benefits of forfaiting to Exporters:
1.Forefaiting helps exporters to get liquidity by converting recievable into cash by selling recievables to the forfaiters.
2.In forefaiting there is no risk associates like interest rate risk,foreign exchange risk,political risk,commercial risk ect.
3.It is simple and flexible in nature as it can be alter according to the needs of the exporters.
4.It can be finance upto 100% export value.
5.It can save exporters export credit insurance amount.


Forfaiting Risk Eliminations:
1.Commercial risk:The risk of non payments by non sovereign or private sector buyers or borrowers in his own currency arising from insolvency.
2.Political risk:There is the risk of borrowers country Government actions,which prevent or delay the repayment of export credit.This risk should be eliminate.
3.Transfer risk:There is the risk of an inability to convert local currency into the currency in which debt is denominated.
4.Exchange risk:The should be the risk of fluctuation of exchange rate.so this risk should be eliminate.


Criteria for Forefaiting:
1.Normal durationof recievable for using forefating is between 1 to 5 years.
2.Export contracts are been executed in all major convertible currencies like Pounds,Dollar,Yen ect.
3.Minimum eligible amount for using Forefaiting is Rs 250000 US dollars.

Different between forefaiting and export factoring:
1.In forefaiting,forefaiter finance 100% of bills recievable whereas,In factoring foactor finance only 75 - 85% of the bills recievable.
2.In forefaiting is used in account recievable of capital goods products or any other high value product where payment is recieved in longer duration of time,whereas in factoring is used in trade of general products were payment is recieve immiditely on delevery of goods.