Syndicated lending

A company can raise finance for its business purposes in many different ways. For example, it can raise equity finance through the issuance of shares. Alternatively, it can raise debt finance in the form of a bank loan or through the issuance of debt instruments, such as bonds. If the company decides to raise debt finance in the form of a bank loan, it can do so either by borrowing from one bank or lender – known as a bilateral loan – or by borrowing from two or more banks or lenders – known as a syndicated loan. The English word “syndicate” is based on the French word syndicat, which means a union or association.

There are several reasons why a company may decide to borrow from two or more banks or lenders. If the loan amount is large, it may be difficult for a single lender to provide the full amount if it would breach its internal lending limits. Even if there is no problem with lending limits, a single lender may be reluctant to assume the full credit risk on the loan and would prefer to share the risk with other lenders. On the other hand, if the borrower is a blue-chip company with a high credit rating, it may invite a number of banks to lend to it so that it can negotiate favourable terms, including a commercially attractive interest rate. In this situation, a bank will often be keen to participate in the loan in order to enjoy the prestige of lending to a well-known company.

This column examines certain issues concerning the way in which a syndicated loan is structured. In particular, it considers the important question of the relationship between the lenders and the circumstances in which an individual lender may take unilateral action to protect its rights under the loan agreement. It concludes by considering the practice in China.

How is a syndicated loan structured?

Put simply, a syndicated loan is a loan by two or more lenders to a borrower on common terms that are governed by a single agreement between all of the parties. Even though the lenders sign a single agreement and agree to lend on the same terms as the other lenders, it is generally understood, at least as a matter of English law, that each lender provides a separate loan to the borrower. This is reflected in the standard wording that is used to describe the rights and obligations between the lenders. Typically, the syndicated loan agreement provides as follows:

• The obligations of each lender are several – in other words, no lender is responsible for the obligations of any other lender or the failure of another lender to perform its obligations under the loan agreement (for a discussion about joint liability and several liability, see China Business Law Journal volume 4 issue 4: Joint and several);
• The rights of each lender are separate and independent rights – what this means is that the borrower owes a separate and independent debt to each lender; and
• Except as otherwise stated in the loan agreement, each lender may separately enforce its rights, such as the right to recover its debt in the event that the borrower fails to repay the loan.

The phrase “except as otherwise stated in the loan agreement” is important. This is because syndicated loan agreements commonly provide that certain action under the loan agreement may only be taken by the agent acting on the instructions of all of the lenders, or a majority of lenders. The agent, who is often the same lender or bank that has arranged the loan, is appointed pursuant to the loan agreement to represent the lenders in their dealings with the borrower. For example, loan amounts made to the borrower and repaid to the lenders are channelled through the agent’s account. In addition, the agent has discretion to take certain actions in order to protect the interests of the lenders, such as requesting financial and other information from the borrower and also accelerating the loan (i.e. declaring that the loan is immediately due and payable) in the event of payment default by the borrower.