Nigerian debt market executed and closed the largest wave of syndicated loans ever witnessed in Nigeria between 2013 and 2015 as up to 15 syndicated loan facilities achieved financial closure. In December 2020, the Bank of Industry (BOI) successfully facilitated a $1,000,000,000,000 (One billion dollars) syndicated term loan in the international market. This marked the third major international debt syndication deal successfully concluded by BOI within the last 3 years.
The relative insufficiency of funds for capital investment is a common factor in every economy, especially in developing countries of the world like Nigeria. While the word “syndicated loan facility” may not alien to some persons, it may be an obscure term to others. This article seeks to distinctly examine the concept of loan syndication as a source of project financing in Nigeria.
What is loan syndication?
The Central Bank of Nigeria (CBN), in its revised guidelines for finance companies, defined loan syndication as a practice in which a Finance Company, in conjunction with other finance companies and/or other financial institutions, each lends a specified amount of money to a borrower at the same time and for the same purpose. The entities participating in the loan syndication cooperate with each other for the duration of the project, as individual Finance Companies may not be able to afford the huge funds involved.
The borrower can be a corporation, an individual project, or a government. Each lender in the syndicate contributes part of the loan amount, and they all share in the lending risk.
The syndicate may be a combination of various types of loans, each with different repayment terms that are agreed upon during negotiations between the Lenders and the borrower.
While there is no single law that governs syndicated loan transactions in Nigeria. There are certain laws and guidelines that place an obligation on parties in a syndicated loan facility. These laws include;
Companies and Allied Matters Act 2020
Banks and Other Financial Institutions Act 2002
Central Bank of Nigeria Act 2007
Securities and Exchange Commission
CBN Rules and Guidelines
Stamp Duties Act
A lender might be a large financial organization like a bank or a group of institutional investors like an insurance company, mutual fund, hedge fund, or pension fund. These lenders can sell their shares of a syndicated loan to other investors on an as-needed basis.
A syndicated loan is structured, organized, and managed by the lead arranger or arranging bank, which is often a commercial or investment bank. The lead arranger collaborates with the borrower to reach an agreement on conditions such as interest rates, repayments, terms, and other factors. The loan is syndicated to allow banks to spread their risks and take advantage of financial possibilities that their individual capital base would not otherwise allow.
The key parties to a syndicated loan may include;
The borrower – the person seeking the funds
The arranging Bank–in charge of structuring the loan
Participating Banks – each lends a percentage of the entire loan amount.
Facility agent – concerned with the administration of the loa, including its disbursement and repayment management
Security Trustee – responsible for holding the security (collateral) for the loan on behalf of lenders
How does loan syndication work?
The process of loan syndication largely depends on the type to be adopted. The different types of loan syndication available include:
Underwritten Deal – An underwritten deal is one where the arranger guarantees the entire commitment and then syndicates the loan. If not fully subscribed, the underwriters’ will be obliged to lend the underwritten sum of money to the borrower themselves.
Best Efforts Syndication – A best efforts deal is one that the arranger does not underwrite. The arranger will commit to a certain amount of the loan and undertake to do their best to find other lenders to provide commitments for the remainder. However, the arranger does not provide any guarantee.
Club Deal – A club loan will usually involve a loan that is pre-marketed to a group of relationship Banks. The borrower may arrange the club loan itself, or alternatively, an arranger may be involved.
Typically, a syndication process is initiated by the borrower, who appoints a lender through the grant of a mandate letter to acting as the deal’s arranger. In large transactions, the arranger is often appointed jointly with other arrangers. The funds to be provided to a borrower in a syndicated loan includes a credit line, a fixed amount, or a combination of both.
Syndication of loans is sometimes done in stages, with an initial group of lenders agreeing to provide a share of the facility. This group of lenders is often referred to as co-arrangers.
The first stage of the loan syndication process is the pre-mandate stage which the borrower initiates. The stage involves the borrower, who either liaises with a single lender or invites competitor bids from multiple lenders. The borrower has to issue a mandate1 to the lead bank, with the offer in the mandate set out on the following conditions;
The negotiation of a credit agreement and other documentation being satisfactory to the syndicate.
There is no material adverse change.
There is no concurrent syndication by the borrowers’ group.
Final credit approved by the bank.
Legal and financial due diligence by the banks.
After the lead lender has been chosen, they will start the appraisal process. The lead bank will see to the needs of the borrower and will, design a loan structure for the borrower and develop a credit proposal.
The next stage involves the lender placing the loan and disbursement. The lead lender initiates selling the loan at the marketplace, for which it will prepare an information memorandum2, term sheet3, and legal documentation4. The lead bank will then approach other banks for participation. Once the loan contract is finalized, the loan amount is disbursed.
The final stage is the post-closure stage which involves monitoring through an escrow account. An escrow account is nothing but an account in which the borrower will deposit the revenue. It is the agent’s responsibility to ensure that the repayment of the loan is the top priority and the payment is done before making payments to any other parties. In the post-closure stage, the agent’s job is to manage the operation and running of the loan facility regularly.
Most syndicated loans are often structured as project finance transactions supported by Special Purpose Vehicles (SPVs); however, it is important to note that direct lending to the Corporate is not unusual and functions fairly well. It often depends on the project type, the proposed funding structure, and the corporate’s financial situation. Nigerian banks have repeatedly demonstrated a preference for project finance arrangements, essentially giving the corporate a “limited recourse”.
1. A document whereby the borrower appoints the arrangers and sets out the term on which the arrangers will arrange the borrowers’ loans.
2. This is prepared by both the arranger and the borrower and is circulated by the arranger to potential syndicate members.
3. The mandate letter will usually be signed with a term sheet attached to it. The term sheet summarises the commercial terms of the proposed financing and is used as a basis for drafting the first draft of the loan agreement
4. Legal documentation includes but is not limited to the loan agreement, letters of guarantee, and collateral agreements.
Guide to syndicated loans & Leverage Finance Transactions by the Loan Market Association, London.
Syndicated Lending in Nigeria, Ose Adeoluwa Binitie
Central Bank of Nigeria Revised Guidelines for Finance Companies in Nigeria, April 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Chiamaka D. Ogbonnaya
The Trusted Advisors
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