Syndicate lending arrangement is a form of lending arrangement where multiple lenders get together to finance a particular borrower. The lenders form a consortium for large amount of lean requested by borrowers. This type of arrangement is typically beneficial where the amount of money required is large and the risk is also high, which is distributed among the lenders. The consortium is formed to pool in the resources to fund a large project. In syndicated lending arrangement, since there are multiple buyers, borrowing risks increases as it is difficult for the borrowers to satisfy all the lenders. Another disadvantage is that the loan process is very time consuming with lot of documentation. The lenders may have their own vested interests and negotiations could be very difficult as against bilateral loan agreements. In case of syndicated loans, once the cashflow or the profitability fails, the smallest lender would want to withdraw its money.
Whereas in bilateral loan agreements, the lender is a single lender or a bank. The loan structuring is relatively simple, and the agreement is a direct agreement between the lender and the borrower. In case the borrower is a company, the loan agreement is governed by the provisions of Companies Act, 2013. Few of such provisions are:
- Company to borrow within the borrowing limits as outlined by the Section 180(1)(c) of the Companies Act.
- Corporate Guarantee Limits Section 186: Companies not to give guarantee or provide security in connection with the loan in excess of 60% of its paid up capital, free reserves, and securities premium account or one hundred percent of its free reserves and securities premium account, whichever is more.
- Company to register charge: As per Section 77 of the Companies Act, the company is to create a charge on its assets, whether tangible or otherwise, for any charge signed by the company. This is a mandatory requirement of the Registrar.
Documentation:
Term Sheet: The documentation of a loan process with the Term Sheet. A term sheet is a preliminary non-binding document, signed between the parties, at the preliminary stages of the transaction pursuant to the preliminary review process. It is an intent document between the parties to enter into the loan agreement and due diligence process starts after signing of the term sheet.
Term Loan Agreement: Once the legal due diligence is completed, a formal Term Loan Agreement is signed between the parties. It is a legally binding document, outlining the terms and conditions agreed among the borrower and the lender. It contains the details of the transactions and legal rights and obligations for each of the parties.
- Security Documents: The security documents act as collateral for the loans that a borrower borrows. These documents depend upon the type of assets of which security is created. They could be hypothecation deeds, mortgage documents, hypothecation of current assets, pledge of shares, assignment of certain types of IPR/receivables etc.
Guarantee Agreement: Guarantee agreements make guarantor liable for paying debts and any pending documents owed to the lender if borrowers fail to make them.
In case of Syndicated loans, additional/different set of documents may be required.
Documents for Syndicated Loans
Consortium Loan Documents: This is a procedural document that requires further documentation on each step. The lead arranger is provided with the appointment letter. The role of lead arranger is to arrange various participants in the loan consortium. The term sheet is signed between the lenders and borrowers through the lead arranger. Thereafter, the due diligence is conducted by the legal advisors. After successful outcome of the due diligence report, the Loan Documentation begins. This includes the appointment of the administrative agent, creation of common terms agreement + bilateral loan agreements OR a joint loan agreement. It is followed by the appointment of Security Trustee and signing of Security Trustee Agreement. Thereafter the guarantees are secured in form of Guarantee Agreements. Inter Creditor Agreements are signed between all the creditors, outlining the way and the process of how they will conduct themselves with each other.
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