What is a Syndicate?

A syndicate is like when four individual runners join up to form a relay team…

Although the runners may ordinarily compete on an individual basis, in a relay event they form a team. They share the distance and work together to finish the race as a group. The team shares any potential risk as well as the rewards.

A syndicate is a group of people or independent companies that form a temporary business partnership to manage a particularly big transaction or promote a common interest. Syndicating allows businesses to share their assets and resources to tackle one project that might be too large or complicated for the syndicate members to tackle independently.

By entering into a syndicate, each business shoulders part of the risks associated with the project or transaction. This helps companies mitigate some of the financial ramifications if the syndicate project falls flat. But it also means that all of the syndicate members get a share of any returns generated as a result of the partnership.

Syndication is common in the banking and insurance sectors. Two or more businesses normally form a syndicate when they're in the same industry. For example, two banks might create a syndicate to offer a particularly big loan to a high-risk party. Each bank would offer up a part of the loan amount. They'd then share in any risks, such as a default, and also share in any profits.

A syndicate is similar to a joint venture, but there are a couple of differences. A joint venture is when two or more parties agree to pool their assets or resources together to create a new business entity. The businesses then share expenses and revenues along the way.

By contrast, a syndicate focuses on completing a single transaction or project rather than a long-term collaborative partnership. For example, three construction businesses might form a temporary syndicate to carry out a big, one-off job like building an airport. After the syndicate completed the job, the businesses would share any returns generated and then go their separate ways.

In a joint venture, two companies might form a contractual business partnership that focuses exclusively on airport construction. The companies involved in the joint venture are still independent. But they might continuously pool a certain amount of resources into the shared business and take part in recurring projects together.

Common syndicate types include underwriting syndicates, banking syndicates, and insurance syndicates.

A syndicated loan is a type of syndicate finance. It’s when a group of lenders work together to offer funds to one borrower. That borrower might be an individual, company, project, or even a government. Syndicate loans often take the form of a fixed amount, a credit line, or both.

Lenders may propose a syndicated loan when the required amount is too big for one bank, financial institution, or financial services provider. For example, let’s say you’re a business owner who wants to borrow a large amount of money through your normal, commercial bank. If that amount is too large for the bank, they might reach out to another lender to contribute to the loan amount.

Syndicated lending helps lenders spread the risk of a borrower default. And syndicate members aren’t limited to banking institutions. Institutional investors like pension funds or hedge funds often take park in syndicated loans.

Syndicated loans are a common way to fund large corporate takeovers or acquisitions. Interest rates on these loans can be either fixed or floating based on benchmark rates.

Syndicate funding is a type of crowdfunding that enables start-ups to get seed funding (the initial investment that’s made in a new company) from independent investors. Syndicate funding is a type of angel investing.

Angel investing is when an individual or company offers funding to a new business in exchange for equity ownership or convertible debt (a type of bond that pays interest to a bondholder). Bondholders can also change convertible debt into common stock shares or equity shares instead.

Syndicate finance sees multiple investors enter into a temporary alliance to pool their funds together. The investors can then spread the risk and potential losses or gains associated with investing in a start-up.

Syndicate funding groups typically include a lead angel investor with experience and knowledge investing in start-ups. That lead investor will typically pick which start-ups the syndicate invests in. They’re then joined by one or more backers. The backers are willing to invest in a business, but they don’t want to take an active role in managing the investment. These backers are also sometimes referred to as passive investors.

Syndicate participants often allocate funding on an ad hoc basis. That means it’s done on a one-off basis as and when required. When syndicate funding is done on an ad hoc basis, a different group contributes an investment for each individual funding round. Alternately, investors can also enter into a formal syndicate that makes repeat investments in new companies.

The loan syndication process involves a borrower and two or more lenders. The arranging bank or agent bank is the party that's responsible for structuring the loan and managing the client relationship. The syndicate then goes on to include participating (or backing) banks. Loan syndicates also typically include a security trustee (or “collateral agent”) that holds the security or collateral of the borrower’s assets on behalf of the lenders. Collateral could include things like deeds, contracts, or stock certificates.

The syndication process typically starts when a borrower appoints an arranging bank. The bank will then prepare a memorandum. The loan memorandum outlines the terms of the transaction before the arranging party sends syndicate invitations to other banks or lenders. That invitation outlines the proposal to encourage other lenders to take part in the syndication.

After enough lenders have committed to the proposal, further documentation is drawn up to structure the deal. From there, all syndicate parties must complete and approve that documentation. Finally, the borrower must satisfy any specified loan conditions before the syndicate of lenders can distribute the money.

An agent typically disburses syndicated loans. It's also important to note that the borrower might need to pay fees and taxes as part of the transaction. From there, the borrower normally pays back the loan just like an individual might pay back a normal bank loan. The final step of the process from the point of view of the syndicate is enforcement and supervision.

Syndicates are also common in the bond market.

Companies, governments, and other organizations use syndicated bonds to sell debt. When a company or an entity wants to generate funds, it finds a group of banks or other lenders to underwrite a bond issue. The underwriting banks can then sell those bonds to investors. If the underwriting banks fail to generate enough interest among investors, the syndicate members then commit to buy the remaining debt associated with the new issue.

Bond syndicates are sometimes used as an alternative to bond auctions.

The most common types of loan syndication are an underwritten deal, best-efforts syndication, and a club deal.

An underwritten syndication deal is when the whole loan amount is guaranteed by the arranging party before it goes out for syndication. That means if the bank or lending company that underwrites that deal can’t find enough investors to subscribe, that arranging party needs to pay the difference.

The fees charged for underwritten deals tend to be slightly higher to compensate for the added risk.

A best-efforts syndication is when the group arranging the loan agrees to underwrite an amount that’s lower than the value of the actual loan. This is often because the borrowers are known to be high credit risk or because a transaction is particularly complicated.

If a best-efforts deal ends up being undersubscribed by investors, the deal often needs to be restructured before it can be agreed and executed.

A club deal is a syndicated loan that’s pre-marketed to a group of lenders. Club deals are often arranged between banks that have engaged with one another in previous syndicate relationships. While most syndicate loans involve an arranging bank or agent, it’s common for borrowers to arrange their own loan proposal in a club deal.