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FL05 - Syndicated Loans
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FL05 - Syndicated Loans
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FL05 – DEBT FINANCE: SYNDICATED LOANS23/10/15
LOAN FINANCE
INTRODUCTION TO LOAN FINANCE
A borrower company (usually part of a group of companies – rarely a
single entity, almost always operates in a group of companies) controlled
by shareholders
A loan finance is a contract between the lender and borrower company in
return for repayment (principal + interest on the loan)
RISK OF DEFAULT
Recap last week
E(F )
NPV F0
1 E ( ri )
o
Default Premium = probability of default
n
E (F ) p j Fj
j 1
o
Time value (rF) and market risk (E(rM)-rF)
E (ri ) rF [ E (rM ) rF ] i
o
Higher Risk = Higher Interest Rate Hence increased cost for borrower
o Both lender & borrower have an interest in reducing risk less risk
of default for lender + lower cost of borrowing for borrower
How can you reduce the risk of default through law?
o Share among many: loan syndication and bond issue [Week 6]
o Security on loans [To be covered in Week 7 & 8]
o Transfer to others (securitization) [Week 10]
o Hedge (derivatives) [Week 9]
o Monitoring/Influencing borrower behaviour (covenants)
o Better ranking than others: subordination
Certain lenders obtain better treatment/ranking
Focus for Today’s Lecture:
o Loan Syndication
o Subordination
o Restrictive Covenants
REVOLVING FACILITIES AND TERM LOANS
Revolving Facilities (e.g. overdrafts)
o Borrower can draw down and repay from time to time
No fixed duration / maturity date whereby the loan must be
paid back by
Advantage of flexibility
Usually used for working capital that is needed on a day to
day basis
o Recurrent expenditure
o Lower costs of financing; but constant refinancing needs for
borrower
Lower interest rate on such revolving facilities due to short
term nature
Term Loans
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