Acompany 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.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.