17
A group of banks work together to provide funds for a borrower is syndicated loan. It is a large loan. There is a lead bank which is sometimes the Arranger or Agent takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan does not involve only one borrower and one lender like bilateral loan. It is a much larger and more complicated version of a participation loan. In syndication more than two banks are involved.
A loan is an assumption of loan. A bank might believe that 5% of all borrowers may go bankrupt. If the cost of fund of the bank is 5% it needs more than 10% interest on the loan to make a profit. As a result banks and the financial markets use risk based pricing and charged an interest rate and it depends on the risk of the loan product in general or the risk of the specific borrower. So, all banks are interested to split or syndicate their large loans with each other.
To avoid large or surprising losses syndicating loans are also chosen. Many management teams favor Smaller and more predictable losses. The general perception of companies with smoother or steady earnings is awarded a higher stock price relative to their earnings. One of the syndicate banks usually acts as an Agent for all syndicate members and acts as the focal point between them and the borrower to avoid the borrower having to deal with all the syndicate banks individually.
