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Tata Capital > Blog > Wealth Services > Debt Syndication: Meaning, Services & How It Works in India

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Debt Syndication: Meaning, Services & How It Works in India

Debt Syndication: Meaning, Services & How It Works in India

When a borrower requires a sum of money that is too large to be provided by a single lender, or outside the scope of the lender’s risk-exposure level, funds are agglomerated from a number of lenders in a process termed as debt syndication. Find out how your business can use debt syndication to scale and run operations.

In this article, we’ll explore debt syndication’s meaning, its importance for businesses, benefits and how to choose the right debt syndication services. 

What is Debt Syndication?

Debt syndication involves a group of lenders funding various portions of a loan to a single borrower. A syndicated loan is a structured product that needs to be arranged and administered effectively. This is usually done by a third party or a consulting firm since there are a number of lending parties involved. The credibility that Tata Capital enjoys in the market has helped Tata Capital cultivate a number of important connections with various lending parties to provide some excellent financing solutions.

Syndication solutions and syndicated solutions were initially used by Fortune 500 companies that required large amounts of funds for their projects. Today, however, SMEs and large corporations frequently seek syndicated loans. These are used to finance power plants, steel plants, refineries and even to fund takeovers, mergers, and acquisitions. With a large number of businesses plying in the Indian market today, the requirement for funds is only likely to grow and debt syndication in India may offer a viable financing alternative to companies.

Why Businesses in India Need Debt Syndication?

A number of businesses in the Indian market today could use additional financing solutions for the financial leverage required to scale operations and grow. For a long time, firms in the Indian market have suffered from a lack of options in financing solutions since the debt market in India was less developed than the equity market. Although the equity route is a viable one for raising funds, it provides the investor with a claim to the business and dilutes the ownership interest of the founders. For this reason, many company owners choose to retain their claim to ownership of the business and restrain themselves from seeking equity funds.

In recent times, however, debt syndication in India has helped bridge the gap between equity markets and debt markets in India. The growth in the availability of syndicated loans means that owners have alternative methods to raise funds for their companies without having to dilute their ownership. In the future, the availability of these loans is only expected to rise based on the trends of other countries like Japan, Korea, and the USA who have developed debt markets. Further, the cumbersome and drawn-out process of having to meet and coordinate with multiple individual lenders is no longer necessary in case of these loans. The increase in the availability of syndicated loans will prove to be a boon for many corporates and entrepreneurs plying in the market today who are in requirement of funds for their respective businesses by way of structured product from Tata Capital.

How Does Debt Syndication Work? Step-by-Step Process

Here’s a step-by-step guide on how debt syndication works:

1. Loan Origination
The borrower approaches a lender with funding needs. The lender reviews the request, project details, and repayment ability, then proposes initial loan terms.

2. Syndication

The agent lender invites other lenders and financial institutions to form a syndicate. They present the loan opportunity, share the borrower’s profile, and explain the project benefits. The goal is to find lenders willing to participate and share the funding responsibility.

3. Loan Structuring and Pricing 

All participating lenders work together to finalise the loan terms. They decide on each lender’s contribution amount, interest rates, and fees. The structure balances risk and return while ensuring the loan works for both borrower and lenders.

4. Loan Documentation and Legal Framework 

Detailed loan agreements are prepared outlining repayment schedules, terms, conditions, and security measures. Additionally, legal teams ensure all documents comply with regulations and protect everyone’s interests. 

5. Closing and Disbursement 

Lastly, all parties sign the final agreements. Once complete, the loan amount is released to the borrower. The lead arranger or the initial lender sets up accounts for managing repayments and monitoring compliance with the agreed terms throughout the loan period.

Major Uses of Debt Syndication in India 

Debt syndication is an important funding option in India, especially for large business requirements. Its key uses include:

  • Infrastructure Projects: It helps finance large projects like roads, airports, power plants, and urban development that need very large capital.
  • Project Finance: Companies use it to set up new facilities or expand existing ones, such as factories and industrial plants.
  • Business Expansion and Acquisitions: Syndicated loans support mergers, acquisitions, and takeovers that require large funding.
  • Working Capital Needs: Businesses use it to manage daily operations, including short-term funding and cash flow requirements.
  • Equipment Financing: Manufacturers use it to purchase machinery and production equipment.
  • Real Estate Development: Developers fund large residential and commercial projects using syndicated loans.
  • International Expansion: Companies use debt syndication to raise foreign currency loans for overseas growth.

Benefits of Debt Syndication for Businesses

Debt syndication offers several advantages that make it an attractive financing option for businesses:

1. Saves Time and Effort

The borrower deals only with one main lender, called the arranger. This lender handles discussions with other lenders, making the process simpler and faster.

2. Flexible Loan Structure

Since multiple lenders are involved, the loan can include different interest options, such as fixed or floating rates. Borrowers may also raise funds in different currencies, helping reduce currency risk.

3. Access to Large Funds

Syndicated loans make it possible to raise very large amounts for major projects like infrastructure, mergers, equipment purchases, or expansion. This would be difficult for a single lender to fund alone.

4. Builds Strong Market Image

Having multiple lenders support a project improves the borrower’s credibility. A good repayment record on syndicated loans also helps secure future funding more easily.

Debt Syndication vs Loan Syndication 

Loan syndication and debt syndication’s meaning is the same in practice. Both describe a funding arrangement where several lenders jointly finance a single borrower to meet large borrowing requirements. 

Either you call it debt syndication or loan syndication, the purpose remains consistent: to enable large-scale financing for major projects like infrastructure development, corporate expansions, mergers and acquisitions, or capital-intensive ventures.

How to Choose Debt Syndication Services & Identify a Good Advisor

When choosing debt syndication services or advisor, here’s what you should look for:

1. Industry Experience and Track Record

Look for advisors with proven experience in your specific industry sector. Experienced professionals having years of experience in advising and serving clients in debt syndication and structured finance bring valuable insights. You must review their past deals, client portfolio, and success rate in closing syndications of similar size and complexity.

2. Comprehensive Service Offering

Choose advisors who provide end-to-end support throughout the entire syndication process. From structuring and negotiation to closing the deal, complete support throughout the entire debt syndication process ensures a smooth and timely transaction. 

3. Deep Market Knowledge and Expertise

The advisor should understand current debt market conditions, lending norms, interest rate trends, and regulatory requirements. They should be able to advise on optimal loan structures, tenure, and repayment schedules.

4. Transparent Fee Structure

Understand the advisor’s fee model upfront. Good advisors maintain transparency about all costs involved, with no hidden charges that could impact your overall cost of capital.

5. Strong Negotiation Skills

The advisor should be skilled at negotiating favourable terms on your behalf, including competitive interest rates, flexible repayment options, and prepayment flexibility. Their expertise should result in better terms than you could secure independently.

Risks Involved in Debt Syndication Deals

Here are the challenges you might face during debt syndication deals:

  • Lengthy negotiations: Finalising terms can be time-consuming and may require expert legal and financial support.
  • Multiple lender coordination: Working with multiple lenders may cause delays in communication and decision-making.
  • Additional costs: Syndication may involve legal, advisory, and processing fees, which can increase overall expenses.

Debt Syndication Fees & Typical Cost Structure

Understanding the fee structure is crucial when considering debt syndication, as these costs significantly impact the total borrowing expense. Let’s look at this complete breakdown to understand this:

Upfront fee: It is typically a percentage of the loan amount and is paid upfront by the borrower. It compensates the lead arranger for organizing the syndicate, structuring the deal, preparing documentation, and coordinating with multiple lenders.

Underwriting fees: These are fees charged to the borrower for the risk taken by the underwriters. When lenders guarantee to provide the full loan amount regardless of syndication success, they charge this fee for assuming that risk.

Commitment fee: It is charged to the borrower for the commitment made by the lenders. It’s charged on the undrawn portion of the loan facility to compensate lenders for keeping funds available.

Administrative fee: This is a fee charged by the agent lender for administrative services. These include managing loan disbursements, tracking repayments, coordinating communication between borrowers and lenders, and handling ongoing loan administration.

Processing and Legal Fees: It covers due diligence, credit appraisal, documentation, legal counsel fees, and regulatory compliance costs.

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FAQs

What is debt syndication meaning in simple terms?

Debt syndication meaning is when multiple lenders jointly provide a large loan to a borrower, sharing the risk and funding. A lead lender arranges and manages the loan among participating lenders.

When should a company use debt syndication services?

Companies can opt for debt syndication services when they require large funding beyond one lender’s limit, want better terms through competition, need to diversify lender relationships, or need customised and complex financing structures.

What types of companies need debt syndication the most?

Debt syndication is usually needed by large corporations, infrastructure developers, real estate firms, rapidly expanding businesses, and companies that require a lot of working capital.

How does Tata Capital’s debt syndication service work?

Tata Capital arranges customised debt solutions by leveraging its global network of financial institutions, NBFCs, private equity and hedge funds, and investors. It syndicates various products including project and working capital loans, external commercial borrowings, debt refinancing, short- and medium-term corporate loans etc. to meet your capital needs with optimal terms.

Are debt syndication and loan syndication the same?

Yes, both debt syndication and loan syndication mean the same thing. Both terms refer to the process where multiple lenders come together to provide a large loan to a single borrower, sharing the risk and returns among themselves.

What are the typical documents needed for debt syndication?

Typical documents required for debt syndication include KYC documents such as PAN card and Aadhaar card, along with the company's PAN card. Companies must submit a comprehensive project report, bank statements for the past 12 months, and proof of business registration. Additionally, proof of company turnover and documents detailing any existing loans are necessary. 

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