Until 1998, this would have been all there is to it.
The “retail” market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors such as mutual funds, structured finance vehicles and hedge funds.īefore formally offering a loan to these retail accounts, arrangers will often read the market by informally polling select investors to gauge appetite for the credit.īased on these discussions, the arranger will launch the credit at a spread and fee it believes will “clear” the market. Once the loan issuer (borrower) picks an arranging bank or banks and settles on a structure of the deal, the syndications process moves to the next phase. Seasoned leveraged issuers, in contrast, pay lower fees for re-financings and add-on transactions.īecause investment-grade loans are infrequently drawn down and, therefore, offer drastically lower yields, the ancillary business that banks hope to see is as important as the credit product in arranging such deals, especially because many acquisition-related financings for investment-grade companies are large, in relation to the pool of potential investors, which would consist solely of banks. Merger and acquisition (M&A) and recapitalization loans will likely carry high fees, as will bankruptcy exit financings and restructuring deals for struggling entities. How strong market conditions are at the time.And by different we mean more lucrative.Ī new leveraged loan can carry an arranger fee of 1% to 5% of the total loan commitment, depending on In many cases, moreover, these highly rated borrowers will effectively syndicate a loan themselves, using the arranger simply to craft documents and administer the process.įor a leveraged loan, the story is very different for the arranger. Struck during the loan market’s formative days, the RJR deal relied on some $16.7B in loan debt.īy contrast, large, high-quality, investment-grade companies-those rated triple-B minus and higher-usually forego leveraged loans and pay little or no fee for a plain-vanilla loan, typically an unsecured revolving credit instrument that is used to provide support for short-term commercial paper borrowings or for working capital (as opposed to a fully drawn loan used to fund an acquisition of another company). KKR’s $25B acquisition of RJR Nabisco was the first-and remains the most (in)famous-of the high-flying LBOs.
Bank loan risk engine plus#
The issuer pays the arranger a fee for this service and, naturally, this fee increases with the complexity and riskiness of the loan.Īs a result, the most profitable loans are those to leveraged borrowers-those whose credit ratings are speculative grade (traditionally double-B plus and lower), and who are paying spreads (premiums above LIBOR or another base rate) sufficient to attract the interest of nonbank term loan investors, (that spread typically will be LIBOR+200 or higher, though this threshold rises and falls, depending on market conditions). The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateral-one company, one lender-credit lines.Īrrangers serve the time-honored investment-banking role of raising investor dollars for an issuer in need of capital. Starting with the large leveraged buyout (LBO) loans of the mid-1980s, the leveraged/syndicated loan market has become the dominant way for corporate borrowers (issuers) to tap banks and other institutional capital providers for loans.
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