Borrowing from relationship banks might save thousands and thousands of {dollars} for debtors within the major market of syndicated loans, says Yafei Zhang, Lecturer in Finance at Alliance Manchester Enterprise Faculty.
Syndicated loans are among the many most essential exterior financing sources for companies all around the world. To offer a way of scale, in accordance with Thomson Reuters DealScan, the annual common proceeds from syndicated mortgage issuances had been roughly $2 trillion from 2005 to 2022.
Such loans are a lot bigger than company bond issuances and a number of other instances the proceeds of fairness choices, together with each preliminary public choices (IPOs) and seasoned fairness choices (SEOs).
Moreover, the expansion of the market has eclipsed that of the bond and fairness markets, significantly for the reason that 2007-2009 international monetary disaster. Whereas sometimes solely massive and public companies have entry to the bond and fairness markets, debtors within the syndicated mortgage market vary from massive public companies to medium dimension personal entities.
Massive offers
Nearly each massive merger and acquisition deal is financed by syndicated loans. As an example, Elon Musk, the present CEO of X (successor of Twitter) issued a $25.5 billion syndicated mortgage led by Morgan Stanley (participant lenders included Financial institution of America and Barclays) to purchase Twitter in April 2022.
Non-public fairness companies are additionally frequent debtors within the syndicated mortgage market. In July 2023, one of many largest personal fairness buyers within the expertise business, Silver Lake, raised about $1.1 billion in a syndicated mortgage organized by JPMorgan, Citigroup, and Santander to fund its takeover of German firm Software program AG.
Some companies additionally faucet into the syndicated mortgage market to boost finance for normal company functions. In Could 2023, London-based knowledge centre enterprise AtlasEdge raised $900 million from a syndicate of banks together with ING Financial institution (the lead arranger), Scotiabank, NatWest, Santander, and UniCredit Financial institution for a cross-border enlargement technique.
E-book-building
Though syndicated loans are usually not securities that may be issued to public buyers, they use the identical book-building course of within the major market as issuing shares and company bonds.
As an example, after a financial institution wins the lead mandate it’s going to put together an data memo (IM) that features a preliminary time period sheet describing pricing, collateral, covenants, and different credit score phrases. The lead financial institution then distributes this IM to potential buyers to solicit demand and every potential investor performs its personal credit score evaluation and comes up with the quantity and value at which it’s prepared to commit.
If the mortgage is under-subscribed, the lead financial institution might want to sweeten the deal by rising the yield-to-maturity (YTM). If the mortgage is over-subscribed, the lead financial institution would cut back the YTM. This so-called ‘book-building’ course of continues till pricing is agreed upon and all buyers’ allocations are finalized.
Commerce-off
This observe creates an fascinating trade-off for a lead financial institution. On the one hand it might conduct its personal due diligence a few borrower to cut back the necessity to accumulate data from different buyers. On the opposite, it might spend much less time on due diligence and depend on data from different buyers with a price.
A current paper I co-authored, Lending Relationships and the Pricing of Syndicated Loans, examines how this trade-off impacts the pricing course of and borrowing prices for syndicated mortgage debtors.
We’ve got discovered {that a} lead financial institution that has a stronger prior lending relationship with a borrower (measured as the proportion of loans organized by the lead financial institution out of all of the loans by the borrower throughout the previous 5 years) depends much less on data from different syndicate members and selects fewer participant lenders which have relationships with the borrower. In consequence, the scale of the yield-to-maturity (YTM) adjustment is smaller through the pricing course of.
We additionally discover {that a} stronger borrower-led financial institution relationship reduces mortgage underpricing – the primary secondary market buying and selling value (increased than the supply value) minus the supply value.
What our research due to this fact suggests is that accumulating data from different buyers will be exceptionally costly for syndicated mortgage issuers. And finally, borrowing from relationship banks might save thousands and thousands of {dollars} for debtors within the major market of syndicated loans.