34
Loan syndication for domestic borrowings in Merchant Banking What is merchant banking ? Non-Banking Financial Services cover things like merchant banking, under-writing, portfolio management services, investment advisory services, financial consultancy, stock broking, , venture capital, custodial services, factoring, credit reference agencies, credit rating agencies leasing etc. Merchant banks, which include the subsidiaries of commercial banks and financial institutions, as also a number of private financial services companies, offer a variety of services. These include advice on project financing, loan syndication, pre-investment studies and feasibility studies for investors, public issue management and underwriting, foreign currency finance and corporate financial advice. merchant banks are not authorized to undertake banking services such as deposit taking and lending. Their activities are regulated by Securities Exchange Board of India (SEBI) and Reserve Bank of India(RBI) Basically , a merchant banker operates in the following key areas :- Capital Structuring Capital structuring for project finance, financing of expansion/diversification proposals, evaluating future cash flows and quality of earnings, selection of appropriate instruments, formulating optimum mix of debt and equity and pricing of the instrument. Restructuring existing capital to obtain the benefit of lower capital cost by judicious mix of debt and equity.

Loan Syndication for Domestic Borrowings in Merchant Banking

Embed Size (px)

Citation preview

Page 1: Loan Syndication for Domestic Borrowings in Merchant Banking

Loan syndication for domestic borrowings in

Merchant Banking

What is merchant banking ?

Non-Banking   Financial  Services  cover things like  merchant  banking, under-

writing, portfolio management services, investment advisory services,  financial

consultancy, stock broking, ,  venture capital,  custodial services, factoring, 

credit reference agencies, credit rating agencies leasing etc. Merchant banks,

which include the subsidiaries of commercial banks and financial institutions, as

also a number of private financial services companies, offer a variety of

services. These include advice on project financing, loan syndication, pre-

investment studies and feasibility studies for investors, public issue

management and underwriting, foreign currency finance and corporate

financial advice. merchant banks are not authorized to undertake banking

services such as deposit taking and lending. Their activities are regulated by

Securities Exchange Board of India (SEBI) and Reserve Bank of India(RBI)

Basically , a merchant banker operates in the following key areas :-

         Capital Structuring

Capital structuring for project finance, financing of expansion/diversification

proposals, evaluating future cash flows and quality of earnings, selection of

appropriate instruments, formulating optimum mix of debt and equity and

pricing of the instrument. Restructuring existing capital to obtain the benefit of

lower capital cost by judicious mix of debt and equity.

         Loan Syndication

Loan syndication comprising estimating capital requirements for the

project/expansion/diversification proposal, selection of suppliers of funds,

preliminary discussions with identified lending institutions, preparation of loan

application, rendering assistance in project appraisal with the financial

institutions, obtaining sanction letter from the lenders, assistance in compliance

Page 2: Loan Syndication for Domestic Borrowings in Merchant Banking

of terms and conditions for the availment of the loan, assistance in

documentation and creation of security and disbursement of loan.

        Working Capital Loan Syndication

Estimating the Company's working capital requirements, identifying Bankers,

discussions and negotiations, assistance in compliance with terms and

conditions and documentation requirements, obtaining sanction letter and

follow up for disbursement of funds.

         Appointment Of Lead Managers/Comanagers

Discussions with several merchant bankers, presentation of the project,

negotiating their terms, evaluating their letters of offers and selecting merchant

banker/s to the proposed issue in consultation with the Company.

         Credit Appraisal

Preparing credit appraisal application, rendering assistance in credit appraisal

and securing rating for specified instrument.

         Venture Capital Syndication

Venture capital syndication comprising discussions with various venture capital

agencies, presentation of the project, selection of agency, preparation of

application, rendering assistance in project appraisal, negotiating terms and

conditions regarding buy back arrangements and pricing, and obtaining their

consent letter.  

         Documentation

Preparing of underwriting profile and prospectus in case of the public issue,

drafting of the letter of offer in case of a rights issue, and any other related

documents that may be required for statutory compliance.

         Underwriting And Bridge Finance

Securing underwriting support for the issue and obtaining of bridge finance at

competitive rates.

Page 3: Loan Syndication for Domestic Borrowings in Merchant Banking

         Placement Of Shares With Mutual Funds/Financial Institutions

And Foreign Investment Institutions

Syndication of equity either as firm allotment or as reservation in the public

issue from Mutual Funds, Financial Institutions and Foreign Financial

Institutions.

         Placement Of Reserved Quota With Non Resident Indians /

Overseas Corporate Bodies

Syndication of large parcels of equity with high net worth Non Resident

Indians/Overseas Corporate Bodies including obtaining  RBI permission for such

investments.

         Appointment Of Registrars

Discussions with several registrars, evaluating their terms, selecting registrars

to the issue and coordinating between registrars and bankers for processing of

applications and negotiating the basis of allotment with the stock exchange.

         Appointment Of Printers

Discussions with printers, evaluating their terms, selecting an agency,

supervising printing of prospectuses, application forms, brochure and ensuring

delivery of the material to targeted centers.

         Appointment Of Bankers

Discussions with bankers, negotiating terms on utilization of float, selecting

refund bankers, coordinating collections between centers and reconciling

banker collection statements.

         Appointment Of Advertising Agency

Selecting advertising agency, formulating plan for marketing, holding press and

brokers conferences, preparation of media plan, newspaper announcements and

allied matters.

         Marketing Of The Issue

Page 4: Loan Syndication for Domestic Borrowings in Merchant Banking

Formulating a marketing plan comprising positioning of the issue, media

selection, targeting investor clusters, presentation of project to the brokers,

creating models for crystallizing optimum subscriptions, negotiating terms with

brokers and selecting brokers to the issue.

         Follow Up On Procedural Requirements

Coordinating the printing, publicity and advertisements related to the issue,

banking arrangements for receiving applications, monitoring day to day

collection figures, coordinating with bankers and Registrars for processing of

applications and negotiating the basis of allotment with the stock exchange.

Thus ,in short, the merchant banker has the job of :-

         Advising corporate on raising funds by way of equity shares/ preference

shares, fully, optional, convertible, non convertible debentures or through

fixed deposits. Also advising them on quantum and timing of such offers

         Assisting clients in finalization of prospectus (offer document), obtaining

approval from regulating authorities.

         Assisting clients in arranging under-writing from banks, institutions,

corporates & stock brokers.

         Planning, coordination and overall monitoring of various activities of various

intermediaries relating to the public offer.

         Advising corporates on restructuring.

         Advising corporates on mergers and acquisitions.

Each of the individual areas mentioned above can be make a topic of discussion

on its own. However , in this project we will be dealing only with the “ Loan

syndication for domestic borrowings “

Loan Syndication  - the concept

Loan syndication refers to the services rendered by the merchant bankers  in

arranging and procuring credit from financial institutions(FIs) , banks , other

Page 5: Loan Syndication for Domestic Borrowings in Merchant Banking

lending and investment organizations for financing the client’s project costs or

meeting working capital requirements. In other words , it is a project finance

service. Syndication is used by merchant banks to meet their customer’s needs

for large scale funds. While there is no limit on the amount, most deals are of

atleast $50 million or its equivalent, with a maturity of seven years. In sequence

of merchant banking services  , it ranks next to project counselling.  Once the

client has decided about the project proposed to be undertaken , the next step

is looking for the sources from where the funds could  be procured to

implement the project. The responsibility of locating the sources of finance ,

approaching the sources by putting in requisite applications and complying with

all the formalities involved in the sanction and disbursal of loan rests with the

merchant bankers .

Loan syndication - the sources of funds

Loan syndication in the case of domestic borrowings is undertaken with the

institutional lenders and the banks. Amongst institutional lenders , the following

institutions are the main suppliers of long and medium term funds with which

the merchant bankers contact liaison and arrange loans , working for and on

behalf of the clients.

A. Some of the All India Financial Institutions  include:

i)       Industrial Finance Corporation of India (IFCI)

ii)      Industrial Development Bank of India (IDBI)

iii)    Industrial Credit and Investment Corp. of India (ICICI)

iv)    Industrial Reconstruction Bank of India (IRBI)

B. State financial institutions like :

i)       state financial Corporations(SFCs)

ii)      State industrial development corporations(SIDCs)

iii)    State Industrial and Investment Corp. (SIICs)

Page 6: Loan Syndication for Domestic Borrowings in Merchant Banking

are also approached by the merchant bankers

C. All India level investment institutions also help in the process . They include ;

i)       Life Insurance Corp. of India

ii)      Unit Trust of India

iii)    General Insurance Corp. of India an its subsidiaries.

D. Commercial Banks

Commercial banks join consortium financing with All India financial institutions

to provide medium term loans to industrial projects , otherwise they cater to the

needs of working capital requirements .

Loan Syndication - the process

Project details and estimated capital requirements

The service of loan syndication fixes up the responsibility upon the merchant

bankers to help the company in availing the credit finance. Hence the merchant

bankers should have correct assessment of the projects , products, promoters,

project cost and profitability projections based on sales forecasts. In this

direction the merchant baker has to take the following steps :

a)     Initial discussions with promoters

The initial discussion should be devoted to know the following aspects :-

         background of the promoters in detail

         promoters contribution to the project

         details about the project report and

         progress of the project.

b)     assessment of project

Page 7: Loan Syndication for Domestic Borrowings in Merchant Banking

An estimate of the capital cost of the project should be worked out to find out its

long term feasibility and whether the merchant bankers should actually go in

for the project.

Locating sources of funds

The choice for sources of funds will depend upon the following :-

i)       nature of the project

ii)      quantum of the project costs

Sources of funds can be divide into three categories :

i)       short term finance where the funds are required upto a period of 1 year.

Such finance is require dot meet the working capital requirements or special

seasonal needs. These are available from commercial banks , trade credit ,

public deposits , business finance companies and also from customers.

ii)      medium term finance where the funds are needed for a period of 1-5 years.

Such finance is needed to provide funds for permanent working capital ,

expansion or replacement of assets etc. These are available from SFCs ,

commercial banks and All India Financial Institutions through special

schemes.

iii)    long term finance where the funds are needed for a period of more than 5

years.  One term funds could be borrowed from international institutions

where merchant bankers an play a constructive role through loan

syndication services.

Preliminary discussions with the lenders

During the preliminary discussions , the merchant bankers should have

clarifications from lenders on the following questions whether the particular

industry is in a priority framework of the development finance institutions.

Concessional finance and benefits available :

         The acceptable Debt-Equity ratio

Page 8: Loan Syndication for Domestic Borrowings in Merchant Banking

         Promoters contribution and background

         Project particulars.

Preparation of the loan application and follow-up

Before filing the loan application the merchant bankers must ensure that the

client company has complied with the following formalities so that appraisal of

the application is not delayed. In the case of consortium approach or joint

financing of the project , the application will be filed with one development

finance institution and the company or the merchant banker will deal with only

one institution termed as ‘lead institution’ . The project will be appraised and

sanctioned under ‘single window’ concept method of dispension of credit.

Rendering assistance in project appraisal

The project is appraise from different angles viz. technical, financial,

managerial , economical and social.

Obtaining letter of intent from the lending institution or bank

The merchant bankers has to follow up closely the sanction of the loan amount

by the lender . The appraising institution takes the matter to its board of

directors or the appraising office may put up the proposal with full appraisal

note before the sanctioning authority for according necessary sanction. Then

the financial institution informs the applicant borrower of such sanction along

with the detailed terms and conditional and arrangements of any with other

lending FI s  in case of consortium financing. The sanction letter mainly covers

the following :

         amount of loan

         interest

         commitment charge

         security for the loan

         conversion option

Page 9: Loan Syndication for Domestic Borrowings in Merchant Banking

         repayment of loan

Loan Syndication - the instruments

There are several main groups of instruments on offer in the syndicated loan

market :

•Term loan : This type of loan is fully drawn and is either repaid in full at

maturity (bullet payment) or repayments may start before the final maturity

(staged repayment). The borrower has a right to call all or part of the loan at

any time without paying penalty, but it cannot redraw any part it has canceled.

•Revolving credit facility : A revolving credit facility gives the borrower more

flexibility about how much principal can be outstanding during the loan’s life.

•Evergreen facility : A loan that can be extended after pre-set periods. For

example, a five year evergreen loan could be extendible every year for another

five years.

•Back-stop facility : A back-stop facility protects a company against liquidity

crunch; it is a loan designed to be drawn only as the last resort. Many

borrowers regard back-stop as an insurance policy in case they suffer

temporary shortfalls in funds or a failure of one of their normal funding sources.

Most back-stops also include a swingline facility, which gives the borrowers the

"same day money".

Loan Syndication - the fees

        Front end fees

i) Arrangement fee

This is the total of the upfront fee paid to the bank that is mandated to arrange

the syndication for its work in structuring, syndicating and negotiating the

documentation. It is normal market practice that the arranger will keep part of

this fee as praecipium. The other front end fees are all paid out of the

arrangement fee.

ii) Underwriting fee

Page 10: Loan Syndication for Domestic Borrowings in Merchant Banking

 If a loan is underwritten as opposed to a best efforts placement, the members

of the underwriting group are paid a flat fee based on their initial underwriting

commitment prior to general syndication. If there is a residual fee income left

after syndication then this pool may also be distributed to the underwriting

group.

iii)Participation fee

This is an upfront fee paid to participant banks joining a facility in the

syndication process and is payable on the amount of each bank’s final

commitment to the loan.

        Annual fees

i) Commitment fee

This is charged on the undrawn element of either a term loan or revolving

credit to compensate banks for the contingent liability. The commitment fee is

normally set at a level equal to half of the margin. However it is unlikely that

the fee will exceed 0.5% regardless of the size of the margin. In some cases the

commitment fee may be linked to the level of utilization of credit. If a term loan

has a short availability period or a predefined draw-down date, then no fee may

be charged or may not be payable for the initial thirty days or so from signing.

ii) Facility fee

This fee is normally charged only on pure commercial paper standby or back-

stop facilities. The fee is payable on the full amount of the facility regardless of

the utilization and is applied in place of a commitment fee. Apart from the

commitment fee, which is paid on a per annum basis, there are a number of

differently termed fees associated with loan syndication. These are:

iii) Management fee

This is the total fee paid by the borrower to the lead manager(s).

iv) Co-manager’s fee

It is nearly the same as above.

Page 11: Loan Syndication for Domestic Borrowings in Merchant Banking

v) Praecipium

This is part of the management fee set aside for the lead manager(s) for their

additional work in putting the syndication together.

vi) Agent fee

This is a fee paid separately to the agent specifically for their services as agent

bank.

Loan syndication - the advantages

•Cost of funds :

This mode of financing is cheaper than their average cost of funds raised

through a series of bilateral loans. The cost saved increases as the amount

required increases.

•Maturity Profile :

These facilities have a wide maturity range starting from an year to 20 years.

•Diversity of credit risk :

 Banks are also prepared to lend to non-investment grade companies, to

borrowers not rated and to borrowers who are starting operations. Another

advantage is that the banks will consider and price a range of credit

enhancements, such as security over assets, off-balance sheet structures,

security over property and using offshore vehicles to channel cash flows; which

reduces funding costs for non-investment grade borrowers.

•Confidentiality :

 Confidentiality of the process can be ensured.

•Size :

 Funds larger than $1 billion have been raised by syndicated loan market. A

case in point is the Hanbo Steel Company of S.Korea which raised close to $5.8

billion through syndicated loans to finance its expansion and modernisation.

Page 12: Loan Syndication for Domestic Borrowings in Merchant Banking

•Speed and certainty :

Once a borrower has mandated a group of banks to underwrite a loan it can be

certain that it will have the funds it requires and on the terms it needs.

•Flexibility :

Unlike highly standardised debt markets, banks are willing to price a wide

range of transactions incorporating non-standard cash flow. A borrower can

incorporate a variety of instruments like multi-currency options, risk

management techniques and pre-payment of the loan in advance without paying

a fee.

•Currency :

 Most bank lenders, provide freely convertible currencies while international

bank markets change their positions regularly and are generally reluctant to

buy bonds in a currency that is weakening.

•Renegotiation :

Renegotiation may be possible under certain situations.

Page 13: Loan Syndication for Domestic Borrowings in Merchant Banking

 

Loan syndication for domestic borrowings -  the current scenario

The Reserve Bank of India announced, in April 1997, a series of measures to

free banks from the shackles of norms and other restrictive rules large

advances. One of the measures was to remove the requirement of consortium

lending and, as further gratuitous, it said, ``as an alternative to sole/multiple

banking/consortium, banks are free to adopt the syndication route irrespective

of quantum of credit involved, if the arrangement suits the borrower and

financing banks''.

Syndicated lending for working capital, as advised by RBI, has not yet made its

debut in India, although 15 months have elapsed since it made the suggestion.

Some of the reasons for this are as follows.

Dispute over Interest Rate setting :

The vast majority of such loans the world- over carry a uniform interest rate,

viz., the borrower pays the same interest to all the banks participating in a

syndicated loan. Under Indian conditions, this could prove to be a major

stumbling block. Different banks have different prime lending rates (PLR) and

prime term lending rates (PTLR), with big public sector banks having the lowest

PLR/PTLR and private sector/foreign banks having the highest PLR/PTLR. . If a

blue chip borrower were to seek a syndicated loan at the PLR of a big public

sector bank, all the smaller private/foreign banks would be shut out of the loan;

they cannot obviously lend below their PLR, which would be higher than the

rate paid by the borrower. The one possibility is to treat such loans as being

outside the purview of PLR. But then, the very sanctity of PLR would be lost.  

Dispute over Overall Responsibility :

Secondly, the syndicated form of lending pre-supposes that the main bank or

the leader bank assumes the overall responsibility for the appraisal and

supervision of the loan. Currently, in multiple or consortium lending, all

member banks individually appraise the loan and are also supposed to monitor

the end-use, value of security, the general health of the borrower etc.,

periodically. In syndicated lending, it is unlikely that the Government and RBI

Page 14: Loan Syndication for Domestic Borrowings in Merchant Banking

officers sitting on the boards of various public sector banks would permit the

officers of the member banks in a syndicated loan to rely solely or even

primarily on the leader bank for regular appraisal and monitoring of the loan.

They would expect these officers to do a complete due diligence exercise for the

loan, as if it is solely granted by the member bank. This would defeat the

purpose behind syndication.

Lack of Marketing Skills :

Last of the peripheral reasons is that syndicated lending calls for active, if not

aggressive marketing by the leader bank. Indian banks, primarily in the public

sector, do not possess this skill or if they did possess the skill, it has been kept

under wraps for so long as to be ineffective.

The main reason, of course, is that nowhere in the world has anybody attempted

syndicated lending for working capital (short- term) advances.

 Two of the prerequisites for a syndicated loan are that the period of the loan is

for a few years and the security is a fixed charge on the assets of the borrower,

unless it is on an unsecured basis.          Both these are not met in a short-term

working capital advance. The period of such an advance is contractually short,

not exceeding one year. The security for working capital loans is invariably a

floating charge on assets created with the loan, i.e., current assets on

hypothecation basis. The value the security comprising current assets will be

constantly changing and this kind of security is totally unsuited for a syndicated

loan. Therefore, syndicated loans are not for short-term working capital

advances, for which RBI had recommended that system to all   banks.

Examples

1 . Crompton Greaves Ltd. raises Rs.45 cr

CROMPTON Greaves Ltd (CGL) has raised Rs. 45 crores from the domestic

market by way of loan syndication.  The transaction, which is the first of its kind

in the country, was arranged by ANZ Investment Bank. Typically, in a offshore

term-loan syndication, an arranger bank places the specified amount with a

number of other non-consortium banks. The transaction is structured on a

Page 15: Loan Syndication for Domestic Borrowings in Merchant Banking

uniform pricing basis, with fee sharing indicated upfront and with common loan

and security documentation.

In CGL's case, the total facility of Rs. 45 crores was placed with three banks -

Vijaya Bank (Rs. 20 crores), Indian Overseas Bank (Rs. 15 crores) and State

Bank of Saurashtra (Rs. 10 crores).

The syndicated term-loan, linked to the respective bank prime lending rates

(PLRs), has been priced uniformly at 13.5 per cent per annum payable

quarterly. The four-year loan, repayable in equal installments at the end of

second, third and fourth years, is secured by pari passu first charge on the

assets of the company. The loan and security documentation for all three

participating banks is common.

CGL plans to utilise the amount for modernisation of its plant and machinery

and other capital expenditure programmes. This fund-raising is a part of the

company's overall borrowing programme of Rs. 200 crores for the financial year

1998-99.

2.   Power Finance raises $100 million

POWER Finance Corporation (PFC) Ltd has raised a syndicated loan of $ 100

millions, with a spread of 115 basis points over the London Inter-Bank Offered

Rate (libor), and being arranged by ANZ Investment Bank. The proceeds of this

loan facility will be used for on-lending to India's power sector. The loan has a

maturity of seven years with a put option to lenders after five years, priced at

115 basis points over USD libor.

PFC is the tool through which the Union Government facilitates investments in

the sector and therefore, in addition to its lending role, it lays emphasis on

assisting the Government in institutional development of the power utilities . All

PFC's loans to State-owned borrowers are backed by the State Government

guarantees. In case of default and if payments are overdue by 90 days, further

disbursement is halted. A 2.75 per cent penal interest rate is charged over

existing rate and accelerated repayment of all outstanding is sought after 30

days.

Page 16: Loan Syndication for Domestic Borrowings in Merchant Banking

Conclusion

Several corporates are likely to switch to loan syndication this year following

the removal of maximum permissible bank finance (MPBF) by the RBI in the

slack season credit policy. Corporates such as Gujarat Ambuja Cement and the

Tatas are already thinking of changing their sources and methods of raising

loans.

Several corporates are reported to have expressed their displeasure over the

functioning of consortiums. The corporates were not very happy with the

consortium as there were too many restrictions which did not permit them to

tap sources outside of the consortium despite finer rates at which they were

able to get these loans. Permission had to be sought from all members of the

consortium and this was time-consuming and tedious. A corporate could not

switch banks in a consortium which can be easily done in a syndication. Also, if

the leader in the consortium does not understand the business it lead to delays

in loan sanctioning.

A syndicated loan will therefore allow a corporate to ``shop around'' for the

best rates leading to a virtual rate war amongst the banks. Some of the smaller

banks would be wiped out if corporates began opting for syndicated loans from

this year. The consortium was in a way providing protection to the smaller

member banks. Smaller banks would now have to either meet the challenge and

provide fine rates to corporates or diversify into another area of specialisation.

The Reserve Bank of India is also keen on lowering interest rates as a means to

fuel economic recovery, companies would stand to gain if their liabilities are

linked to the PLRs of banks. However, banks need to assess the risks even more

stringently in such transactions.

Thus the loan syndication market in India is definitely emerging and will

provide corporates with a viable option to the prevailing fixed rate non-

convertible debenture programmes. Moreover, it will allow companies to hedge

their borrowing costs by raising a mix of floating and fixed rate liabilities.

Page 17: Loan Syndication for Domestic Borrowings in Merchant Banking

Bibliography

Merchant Banking : Principles and Practice, by H.R. Machiraju.

Manual of Merchant Banking, by Dr.J.C. Verma.

References

Articles from newspapers, the soft copies of which are made available.

http://ganga.iiml.ac.in/~mishra/Test/mfsmakg/loansyndicton/project.htm

Case studies

KEGOC, Kazakhstan

EBRD provided the state-owned Kazakhstan Electricity Grid Operating Company (KEGOC) with a US$ 400 million syndicated unsecured loan to finance the second stage of the modernisation of substations and high-voltage equipment to ensure the efficiency, reliability and safety of Kazakhstan’s transmission system. The project is the first signing under the Sustainable Energy Action Plan (SEAP), launched by the Government of Kazakhstan and the EBRD, to promote the conservation and rational use of energy resources as well as the efficient and sustainable supply of power and energy in the country.

Given market conditions, it is noteworthy that demand by participants at the 15-year tenor exceeded availability, which resulted in substantial scale-backs at the 12 and 9-year tenors in order to maximise the 15-year tranche availability. This highly successful syndication is expected to send a reassuring signal to the investment community in Kazakhstan, as well as to international investors in Kazakhstan, in currently challenging market circumstances.

The EBRD provided half of the loan to KEGOC with the remaining €127.5 million being syndicated under an A/B loan structure, to financial institutions, namely: Bayerische Landesbank, Dexia Credit Local, Unicredit Group, RZB, Banca Infrastrutture Innovazione e Sviluppo S.p.A, Cordiant Capital, Calyon and Kommunalkredit International Bank.

SeverStal, Russia

A €600 million unsecured loan was made to OAO SeverStal, Russia's leading steelmaker - the loan is being used to finance its energy efficiency programme. SeverStal is one of Russia's biggest energy consumers and this programme will help it reduce its annual promary energy consumption by 5-10 per cent. An impressive achievement in the current market, €450 million was syndicated (in 2 stages, the initial €150 million in December 2007 to the three underwriters Calyon, ING Bank N.V., and Raiffeisen Zentralbank Oesterreich AG, and a further syndication - on a best efforts basis - of €200 m to a group of 15 banks, launched in

Page 18: Loan Syndication for Domestic Borrowings in Merchant Banking

January and closed in April 2008). €100 m over and above the amount targetted by the company was secured, demonstrating that despite the current tighter credit conditions strong support remains available for blue chip Russian borrowers with a strong record and clear business strategy. The tenor was 10 years for the EBRD A loan (of €150 million) and 7 years for the whole B loan.

Bank Eskhata, Tajikistan

A US$ 1.2 million one-year revolving credit line (RCL) was provided to OJSC Bank Eskhata of Tajikistan as part of a US$ 35 million framework facility to support the restructuring of Tajikistan’s agricultural sector. Funds provided under the RCL will be on-lent to farmers for seasonal working capital requirements.

Bank Eskhata, a commercial bank incorporated in Tajikistan, is one of the most dynamic banks in Tajikistan and to date, has based its strategy and growth on providing financial services to micro and small enterprises (MSEs). Bank Eskhata now operates from its Head Office and a branch in Khujand and a further seven branches in Dushanbe, Kanibadam, Isfara, Chkalovsk, Istaravshan, Penjikent and Kurgan-tube. In addition to branches, Bank Eskhata has also developed a network of more then 60 outlets and service points giving it good country-wide coverage.

Bank Eskhata was the first bank to join the EBRD’s Tajikistan Micro and Small Finance Facility (TMSEFF) in 2003 and it has since become the largest provider of MSE loans under the programme

The loan has an A/B loan structure and a tenor of one year. EBRD holds US$ 700,000 on its own account and the B loan of US$ 500,000 was syndicated to SNS Institutional Microfinance Fund, an investment fund managed by Developing World Markets

Volkswagen, Russia

EBRD's largest (equivalent of €750 million) Russian Rouble funded syndicated loan to date was made to OOO Volkswagen Rus, a Russian registered limited liability company 89.8 per cent owned by VW AG and Skoda. The loan is also the largest ever made in the EBRD's history. VW Group is the largest auto manufacturing group in Europe and ranks amongst the top five in the world. Syndication was launched a week before the recent credit turmoil started and the transaction which would have been closed otherwise within 2-3 weeks, took over three months to be closed. However, it was successfully closed - 11 banks committed and the deal was oversubscribed by 13 per cent. The EBRD A loan (Rb equivalent of €150 million) has a tenor of 10 years and the B loan (Rb equivalent of € 600 million) 8 years.

The EBRD facility will finance the construction of a greenfield plant near the city of Kaluga for the production of VW and Škoda models with a new assembly line, body shop and paint shop which will make Volkswagen one of the largest foreign direct investors outside Russia’s oil and gas sector. The new plant will eventually create thousands of jobs in the region and will involve large-scale technology and skills transfers. This will help stimulate competition in the Russian auto sector as well both draw foreign parts suppliers to Russia and provide a new but demanding market for their domestic counterparts.

Kyiv Transport

Page 19: Loan Syndication for Domestic Borrowings in Merchant Banking

A €60 million loan was made to Kyiv PasTrans of the City of Kyiv (“Kyiv PasTrans”) and a €40 million loan to Kyiv Metropolitan of the City of Kyiv (“Kyiv Metropolitan”). The loan to Kyiv PasTrans will be used to finance new buses and trolleybuses and the loan to Kyiv Metropolitan will be used to finance new metro trains.

Each loan is structured on an A/B loan structure with the EBRD holding 60 per cent as an A Loan and the B lenders (Depfa Investment Bank Ltd, Dexia Credit Local, and Hypo Investbank AG) holding 40 per cent of each loan. This is the first municipal loan to be syndicated in Ukraine by EBRD - both loans are to companies owned by the municipality.

ACBA Credit Agricole Bank, Armenia

ACBA-CA was founded in March 1996 to finance the development of the agricultural sector in Armenia as a result of a joint initiative by the Government of Armenia and the European Union. Its primary strategic focus is on providing financial services to micro and small enterprises (MSEs) with a particular focus on rural areas. Though ACBA was created in order to focus especially on the agricultural sector, over time it has diversified into providing services to MSEs in urban areas.

The senior unsecured loan of US$12 million (US$ 6 million from EBRD and US$ 6 million from Microfinance European Rolling Loans Fund S.A., a special purpose vehicle establised in Luxembourg by Citigroup to hold loans to SMEs and MSEs) will enable the Company to expand its lending operations to micro, small and medium-size enterprises in Armenia, including those in rural and remote areas which currently have little or no access to bank loans.

This is the first loan to be syndicated to an Armenian Financial Institution (and is the 2nd loan to be ever syndicated in Armenia, an Early Transition Country). EBRD syndicated the first loan in Armenia in 2004 to Armenia Copper Programme. Through its micro and small enterprises programmes, the EBRD has supported over one million small enterprises throughout eastern Europe, Russia, central Asia and the Caucasus. Across its countries of operations, the EBRD has committed over US$ 1 billion to 105 financial institutions to facilitate US$ 15 billion in loans to micro and small businesses in the region.

Saratov, Russia

A US$ 48.5 million loan was made to OOO Investitsionno-Ipotechnaya Kompania (a special purpose limited liability company incorporated in Russia) in order to develop, construct, own and operate the Saratov Shopping Centre, a family-oriented inner-city community shopping centre with a gross built area of 55,120 sq m and a gross leasable area of 27,400 sq m. Saratov is one of the largest industrial and commercial centres in the Volga region, some 850 km to the south-east from Moscow. Total project costs are US$ 79.7 million of which US$ 31.27 million (39.22 per cent) will be contributed in cash or in-kind (land) by the Sponsor. The EBRD A/B Loan is financing 60.8 per cent of the project costs.

The syndication of the transaction turned out to be extremely challenging. The 13-year tenor of the B loan and the fact that the project is not located in the Moscow region has been an obstacle for most of the eight banks who were invited after RZB AG - who had initially committed for the full B loan - pulled out. Due to the potential delay for the signing of the project, EBRD underwrote the B Loan with the condition to sell down. US$ 22.4 million of

Page 20: Loan Syndication for Domestic Borrowings in Merchant Banking

the loan was successfully sold down in October 2007 to Cordiant Capital and Investkredit AG.

Last updated 14 May 2010

Publications

A guide to EBRD financing

EBRD can serve the needs of clients across a variety of sectors. Consult this simple guide to find out how the Bank might be able to help.

Highlights

Project procurement

Projects financed by the EBRD generate many tendering opportunities.

Enquire about project financing

Review our guidelines and processes before making a formal enquiry.

Business advisory services

The EBRD offers advisory services to small businesses.

Page 21: Loan Syndication for Domestic Borrowings in Merchant Banking

The funding process

An EBRD project cycle can range from 1 to 15 years.

The Trade Facilitation Programme

The programme aims to promote foreign trade.

Loan syndications

We place an emphasis on involving other sources of financing.

http://www.ebrd.com/pages/workingwithus/loans/case.shtml

Loan syndications

Co-financing objectives

A prime objective for the EBRD is, as stated in its founding Agreement, "to mobilise domestic and foreign capital" in its countries of operations. To achieve this objective, Loan Syndications has chosen a flexible and market-oriented approach. Its goal is to broaden the EBRD's co-financing base by increasing the number of commercial lenders with which it works, by continuing to introduce new co-financing structures and methods, and by introducing new countries to the market. The critical factor in the success of these activities is the extent to which commercial sources of finance are willing to commit funds.

Requirements and benefits

For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35 per cent of the long-term capital requirements of a single project or company. Pricing of debt will reflect primarily country and commercial risks and will conform to prevailing conditions in the syndicated loan market. The EBRD's standing as an international institution and, particularly, its preferred creditor status are taken into account in assessing

Page 22: Loan Syndication for Domestic Borrowings in Merchant Banking

the risks. Loans by international institutions such as the EBRD are, by tradition, excluded from sovereign debt reschedulings. Banks participating in loans for which the EBRD remains the lender of record share the benefits of this preferred creditor status.

View list of top 20 participating banks

The EBRD may help borrowers to gain access to the financial market through the provision of guarantees. Various types are available, ranging from all-risk to risk-specific contingent guarantees, but in all cases the maximum exposure must be quantifiable and the credit risk acceptable.

Banking supervisors in many countries allow, either expressly in regulations or in less formal guidance, co-financing through the participation technique used by the EBRD to be given preferential treatment in the application of country risk provisioning requirements. As a result, participations in such jurisdictions may be exempted from the normal country risk provisioning requirements.

Forms of co-financing

Loan Syndications techniques most frequently used to date by the EBRD are:

the A/B loan syndication structure, where the EBRD remains the lender of record for the entire loan and the commercial banks derive benefit from the EBRD's preferred creditor status

assignments of part of EBRD loans to domestic commercial banks in its countries of operations to promote their cooperation in medium-term lending

co-financing with other international financial institutions parallel or joint financing with commercial banks supported by ECAs or with direct lending

ECAs parallel loans with commercial banks parallel loans with official government agencies various guarantee facilities private placements of equity debt co-financing with institutional investors

A/B loan structure and preferred creditor status

For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35% of the long-term capital of a single project or company. Pricing of debt will primarily reflect the commercial risk and will be set to conform to prevailing conditions in the syndicated loan market.

In most emerging markets or economies, commercial banks can be expected to have initial concerns relating to country risk. This risk might embrace, among other things, risks such as debt rescheduling, nationalisation of assets, currency convertibility and hard currency transfer.

The country risk, while taken into account in the pricing, is to a degree mitigated by the EBRD's status as a preferred creditor. The EBRD's status as a preferred creditor does not mean that the EBRD guarantees against country risks.

Page 23: Loan Syndication for Domestic Borrowings in Merchant Banking

Articles 21 and 49 of the Agreement Establishing the Bank, strengthen the case for preferred creditor status of loans made by the EBRD. All of the EBRD's shareholders are signatories to this Agreement, including the countries of operations.

A/B loan structure

The principal form of mobilising external financing is to provide for the participation by commercial banks in EBRD loans. Through this technique, the commercial banks can share with the EBRD the benefit of its status as an International Financial Institution (IFI). Other IFIs include the World Bank, International Finance Corporation, Asian Development Bank, European Investment Bank.

The EBRD, as lender of record, extends a loan to a borrower on terms pre-arranged with, and to be funded by, bank lenders and the EBRD. Structurally the EBRD sells participations, without recourse to itself, in such loans to the banks. The portion which the EBRD lends is often referred to as the A Loan, with the commercial bank portion being referred to as the B Loan. This terminology is also used by the International Finance Corporation. Through the participation mechanism, each bank may benefit from the EBRD's preferred creditor status.

Consistent with its status, EBRD policy is not to reschedule debt payments or participate in debt rescheduling agreements with respect to its loans to private sector borrowers where the borrower's inability to service its debt is due to a general foreign exchange shortage in the borrower's country.

Preferred creditor status

In practice, loans by IFIs similar to the EBRD, including loans extended and participations sold under the lender of record participation technique, have been excluded from sovereign debt reschedulings. Banks that participate in loans to private sector borrowers made by the EBRD, where the EBRD remains the lender of record, may share in the benefit of this preferred creditor status.

In addition, banking supervisors in many countries recognise, either expressly in regulations or in less formal guidance, that co-financing through the participation technique used by the EBRD should be given preferential treatment in applying country risk provisioning requirements. As a result, participations by banks regulated in these jurisdictions are exempt from country risk provisioning requirements.

Although preferred creditor status is intended to give a degree of comfort to commercial lenders against country risk, it is important to note that the EBRD is not able to represent as to its future efficacy, as the preferred status is largely a matter of agreement by governments and bank regulatory authorities, supported to a large extent by past experience.

The EBRD's preferred creditor status has been tested and found to be effective. In August 1998, when Russia declared a moratorium on hard currency debt servicing, all payments due under EBRD A loans and B loans came through in full and on time.

Loan syndications case studies

Article 21

Page 24: Loan Syndication for Domestic Borrowings in Merchant Banking

Determination and use of currencies

1. Whenever it shall be come necessary under this Agreement to determine whether any currency is fully convertible for the purposes of this Agreement, such determination shall be made by the Bank, taking into account the paramount need to preserve its own financial interests, after consultation, if necessary, with the International Monetary Fund.

2. Members shall not impose any restrictions on the receipt, holding, use or transfer by the Bank of the following:

(i) currencies or ECU received by the Bank in payment of subscription to its capital stock, in accordance with Article 6 of this Agreement.

(ii) currencies obtained by the Bank by borrowing:

(iii) currencies and other resources administered by the Bank as contributions to Special Funds: and

(iv) currencies received by the Bank in payment on account of principal, interest, dividends or other charges in respect of loans or investments, or the proceeds of disposal of such investments made out of any of the funds referred to in subparagraphs (i) to (iii) of this paragraph, or in payment of commission, fees or other charges.

Article 49

Freedom of assets from restrictions

To the extent necessary to carry out the purpose and functions of the Bank and subject to the provisions of this Agreement, all property and assets of the Bank shall be free from restrictions, regulations, controls and moratoria of any nature.

http://www.ebrd.com/pages/workingwithus/loans.shtml

Top 20 participating banksRank Participating bank Country

1Raiffeisen Zentralbank Österreich AG

Austria

2 Unicredit S.P.A. Italy

3 ING Groep NV Netherlands

4 Credit Agricole SA France

5 BNP Paribas SA France

6 Erste Group Bank AG Austria

7 Societe Generale France

Page 25: Loan Syndication for Domestic Borrowings in Merchant Banking

8 ABN Amro Bank NV Netherlands

9FMO (The Netherlands Development Finance Company)

Netherlands

10 Commerzbank AG Germany

11 Nordea Bank Sweden AB (Publ) Sweden

12 Cordiant Capital Inc Canada

13 Bayern LB Germany

14Standard International Holdings SA

Luxembourg

15 Intesa Sanpaolo Spa Italy

16Skandinaviska Enskilda Banken AB (Publ)

Sweden

17 Fortis Group Belgium

18Svenska Handelsbanken AB (Publ)

Sweden

19 Danske Bank A/S Denmark

20Sumitomo Mitsui Banking Corporation

Japan

Co-financiers meeting

The EBRD Annual Syndications and Co-financiers Meeting is attended by more than 120 participants representing 70 institutions.

The meeting has become a fixture in the Bank’s annual event’s calendar and presents an overview of the current state of the syndications market. At the same time, it provides bankers and industry experts with a platform to discuss openly broader issues affecting the Bank’s region and the global economy in general.

“The meeting is all about partnership,” said Lorenz Jorgensen, the Bank’s Director for Loan Syndications. “It is a very valuable event for us, as it enables us to have very open discussions with partner banks and institutions.”

Page 26: Loan Syndication for Domestic Borrowings in Merchant Banking

The meeting’s programme also includes panels and speeches discussing other Bank-specific and general topics, such as the EBRD’s investment priorities and the global business environment.

Feedback from the 13th Annual Syndications and Co-financiers Meeting

“Congratulations. A great day and this is a time when EBRD's hard earned experience, knowledge on the ground and continuity is really going to count and help facilitate what needs to get done.”  

Bruce Tozer, Head of EMEA Sales Softs & Agricultural Products, Crédit Agricole Corporate and Investment Bank

“An excellent event with great speakers covering up-to-date topics, and a good balance between presentations and panel discussions. I highly appreciate this annual event and deem it one of the best and most important meetings for syndication professionals active in CEE, Russia and CIS.” 

Christian Eberl, Director, Project & Commodity Finance Loan Syndication, Financing & Advisory, Corporate & Investment Banking, UniCredit Bank AG

http://www.ebrd.com/pages/news/events/cofinanciers2011.shtml (imp ppts)