Legal Lingo: What is a syndicated loan?

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts leading to an often impenetrable wall of jargon for students and trainees. Next up in our Legal Lingo series, which we've introduced to help break down this jargon, is an explanation of what a syndicated loan is. 

Large scale financing – be it for project finance, acquisition finance or working capital – often requires more than one lender. A syndicated loan is an arrangement whereby a group of lenders (the syndicate), which may consist of banks and/or non-banks, provide funds to a borrower. 

The syndicated loan facility may comprise a single loan facility or a variety of facilities such as a term loan, a revolving credit facility, a letter of credit facility, a swingline facility or other similar financing arrangements. Together, these make up a total facility commitment under a single facility agreement which, in the European market, is usually largely based on the recommended forms of primary syndicated loan agreements produced by the Loan Market Association.

At the outset of the deal, the borrower mandates one or more financial institutions to act as mandated lead arranger(s) (MLAs) to negotiate the terms of the facility agreement. Once the MLAs have sold down parts of the total loan amount to interested lenders in the primary market, the loan is syndicated.

The MLAs often keep a larger portion of the loan on their balance sheets while the other lenders often sell their tranches on the secondary market. A lender in the syndicate (usually the MLA) will act as facility agent to administer the loan and, if the syndicated loan is secured, the facility agent (or other lender) will typically act as security trustee.  

Syndication is generally beneficial to lenders as they can participate in a variety of financings of different sizes and split the overall commitment with other lenders. This reduces their exposure to risk as each lender’s liability is contractually limited to the amount of its own commitment. With access to more lenders, borrowers are better able to secure loans of a greater quantum and fund bigger projects.