Debt Syndication-Pros and Cons

Debt Syndication-Pros and Cons

Debt syndication or loan syndication is a process where a group of lenders come together to meet the requirement of a single borrower. This usually happens when the loan amount is too big for a single lender or is beyond his margin of risk. These various lenders then form a syndicate to meet the requirement of such borrower.
The main reason for this is the exposure that each lender has. A syndicate helps to provide the amount but also maintain a reasonable credit exposure.
When such syndicates are made, there are obviously going to be some benefits as well as difficulties. Before forming or borrowing from a syndicate, every person should take few important points in consideration!

Efficient delegation of power is one major benefit of a syndicated loan arrangement. From a borrowers perspective this ensures a fast decision making because of the delegated powers amongst all the members. For the lenders who are a part, this means the burden of taking a decision does not rest on a single shoulder. This becomes the decision of a group. That puts a certain amount of surety and safety for the lenders.
2) The risk or credit exposure of each lender maybe less, but a syndicate together offers more limits for loans. This means that it can take up high value loans without the fear of risking the credit limit. For a borrower this means he can increase his loan requirement if there is a need since the credit limit of a syndicate is higher than that of single lender.
3) The borrower can enter into a single loan agreement rather than entering into separate loan agreements with separate the lenders. This reduces the heavy paperwork and efforts for both the borrowers and the lenders.

There can be errors due to a delay in communication amongst the members or the agent. This can give rise to several unnecessary complications.
2) The borrower becomes responsible to a group of lenders rather than a single entity. This means that if he defaults his payments, he risks opening him to a large number of lenders in one go. Thus he cannot opt for a loan to repay another loan.
3) The borrower has to meet the demands of the syndicate to get the loan approved. This means that there would be varied demands as each member will have atleast one requirement to lend the amount
Debt syndication definitely benefits the borrower; however, it has to be given a complete thought before agreeing to enter into the agreement. If you seek more guidance on the topic, feel free to contact us!

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