Syndicated loan and external financing for Businesses
Companies often face the challenge of finding funds to finance large projects, especially when it comes to multi-billion dollar infrastructure, industrial or energy projects with a long construction period. At the planning stage, our clients must decide whether to use equity capital, finance a project with the help of business partners, shareholders, investors, or use loans from banks and other financial institutions. One of the preferred options is the so-called syndicated loan.
Syndicated loan and other types of external financing
According to the World Bank, financing large projects is a major challenge for fast growing economies.
Today a business can choose the following sources of project financing: • Leasing. • Factoring. • Issue of shares and bonds. • Bank loans, etc.
All external financing instruments have different purposes and usually mean different costs for the companies that use them. All of the above sources of project financing can be used in various combinations, based on the characteristics of a particular business.
Be aware that not every company can get a loan (syndicated or provided through one institution), also due to its poor financial health. In such a situation, it is necessary to look for alternative (even more expensive) sources of financing, and such a solution is often found in practice.
Despite the existing possibilities of obtaining funding from various sources, loans should be the basis of external financing for projects, and other sources should be considered as complementary.
Any major project requires a significant flow of funds, which must flow on a clear schedule to ensure the continuous operation of numerous contractors and subcontractors, manufacturers and equipment suppliers. Depending on the schedule, companies can use different sources of funds at certain stages of construction or operation of the facility.
A bank loan is a common form of external financing for large projects. Due to the variety of forms of lending, this tool can be easily adapted to the individual needs of a particular company. It is also one of the cheapest sources of capital. Thanks to close cooperation with leading commercial banks in Spain and some other European countries.
key features A syndicated loan is a long-term loan usually used to finance a specific project.
The main features of syndicated financing are listed below:
- Long term maturity: usually several years, but there are known examples with maturities up to several decades, especially in the oil and gas sector, energy and environmental projects. • The loan is intended to finance specific activities, including the construction of a new thermal power plant or laying of a gas pipeline. • The funds are partially provided in the form of a revolving loan up to a certain limit established by the agreement.
A syndicated loan is a highly customized financial instrument, which means there are no strict rules. Loan agreements are very flexible and take into account the specifics of each company, its financial health and market position.
One of the features of a syndicated loan is its wide application in project financing. In these cases, the loan amount often exceeds the value of the assets of the entire enterprise, therefore banking institutions tend to apply very restrictive loan agreements.
The role of a financial advisor in obtaining a syndicated loan
High-quality preparation and organization of project financing is the first and most significant step in this process. Company managers need to understand that preparation determines the subsequent success of the entire operation, and the better your company is adapted to the demands of the financial markets, the sooner and on better terms the process will be completed.
When your company first enters the syndicated finance markets with a major project, it is advisable to hire a financial advisor from the start. Such advisory functions are performed by renowned European and American banks such as Merryll Lynch, Goldman Sachs, JP Morgan, Citibank, Deutsche Bank, RBS, West LB and many other world famous brands.
In addition, you can hire a financial advisor from companies that are professionally engaged in such activities, such as Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, TDI Corporate Finance, etc. Of course, the cost of such services from market leaders can be very high.
Havelet Finance Limited is ready to provide businesses with a full range of advisory services, including financial modeling, selection of optimal funding sources and assistance in obtaining a syndicated loan on favorable terms.
The financial advisor is usually selected through a competition announced by the company. His role is to guide the company through the entire financing process in an optimal way. However, this is often limited to optimization of the financing structure without legal advice. The consultant’s fee depends on the loan amount. For the largest loans of about 1 billion euros, this fee can amount to hundreds of thousands of euros. The advisor’s excellent knowledge of the financial market (both domestic and international) will be an advantage for the borrowing company.
The role of a financial advisor in obtaining a syndicated loan
- Conducting a detailed analysis of the financial market. Choosing the most appropriate moment to enter the market to obtain a loan on the best terms.
- Selection of alternative sources of financing for the project, which will supplement or replace the syndicated loan. Determination of the most suitable banks or financial institutions to manage funds. Providing a list of institutions interested in the project.
- Professional assistance in drawing up a business plan at the request of the bank. Execution of official documentation and negotiations with interested parties. Only companies that have experience in syndicated financing or are part of an international group using such financing can enter the market without the assistance of a financial advisor.
Stages of obtaining a syndicated loan for a large project
Preparing documents and arranging syndicated financing usually takes more time than applying for a loan from one bank. A simple contract with standard market terms can take up to 3 months to prepare, while more complex options can take 6 months or more. At this stage, a professional financial consultant helps to clearly divide the organizational process into several stages with deadlines for their implementation. In general, the stages of obtaining a syndicated loan include:
1}Hiring a financial advisor (optional).
2} Selection of proposals, selection of the organizing bank for the consortium and signing of a mandate letter (a document authorizing this bank to organize a syndicate on agreed terms). In some cases, it is possible to sign an underwriting letter, a document guaranteeing a company to organize financing on agreed terms.
3}Drawing up a project financing schedule, taking into account the specifics of a particular business, technical and other possibilities for the implementation of a particular project.
4}Prepare a term sheet, a document that contains a funding request detailing the financial needs of the borrower.
5} Preparation and signing of an information memorandum.
6} A syndication process for arranging financing on specified terms.
7}Selection and signing of an agreement with a law firm.
8}Development of a loan agreement and approval of collateral.
9}Obtaining the necessary official and legal approvals.
10} Signing the agreement.
Syndicated loan standard terms and conditions
Financing large projects through a syndicated loan requires the borrowing company to strictly comply with numerous requirements throughout the term of the agreement. This includes informational, financial, legal or other obligations stipulated by the relevant contract. Particular attention should be paid to the events of default prescribed in the agreement, which can jeopardize the position of the lender or borrower.
In general, in the case of obtaining a syndicated loan, the borrower has to provide a little more information than a regular loan. Disclosure obligations are limited to standard reports such as quarterly and annual reports, often requiring audits. You may need to provide much more detailed reports. The amount of this information is usually agreed upon at the stage of signing the contract. In addition, the company provides its budget and long-term business plan. In addition to standard reporting on project finance, banks may require permission to change a company’s business profile, an obligation to apply for consent (waiver) in the event of a merger with another legal entity, the creation of subsidiaries, and many others.
Bank requirements depend on many factors, including the following: •The size and position of the company in the market. •The amount of the syndicated loan and its maturity. •History of cooperation with agent bank.
The agent bank is the financial institution through which the company contacts the rest of the syndicate. Thus, the bank acts as a coordinator between the borrower and the funding banks. The agent charges a commission for this service. This commission is also negotiated before signing the loan agreement and usually does not exceed 100 thousand euros per year, which is quite a sufficient amount for a large syndicate. Further responsibilities of the borrowing company should include maintaining certain financial ratios within specified limits.
The preferred financing base for large projects in the energy, environmental and infrastructure sectors is a long-term syndicated loan that best meets the needs of such projects. The syndicated loan provides stable financing at relatively low costs. Preparation in this case is extremely important, since the subsequent success of the entire operation often depends on professional planning and competent paperwork. When using syndicated financing, companies should maintain certain ratios within specified limits. These actions are in the best interests of the business as it will minimize subsequent costs. If you are looking for funding sources for a large project, contact
Havelet Finance Limited at any time. We are ready to share our experience and assist in obtaining loans from leading Angel Investors and financial email@example.com