Miran Legal

Attorney

13.12.2022

Syndicated Loan Agreements

WHAT IS LOAN

            Today, loan is defined as money borrowed to be used in a wide range from shopping to project financing by real and legal persons in order to provide ease of payment. In other words, it is the situation where a bank allows its customer to receive goods or services before paying, relying on a commitment to make the payment in the future. There are four basic elements of the loan: time, trust, risk and income. 

            It is seen that sometimes governments, and mostly investors, finance the cash capital they need for big projects by using loan facilities instead of their own resources. The mentioned loans are generally externally sourced loans. Foreign loan use is common especially in underdeveloped and developing countries. Loans are due according to the credit ratings of the countries in the international financial market. Loan is a mandatory financial resource for the continuity of economic growth. Loan, which is defined as giving up the use of a ready-made purchasing power for a certain period of time and transferring this power to another person, appears in different forms. One of them is syndicated loan. 

 

DEFINITION AND ELEMENTS OF SYNDICATION LOAN

            Syndication is a word meaning cooperation, this word of Latin origin also means a group that cooperates for a specific purpose. Syndicated loan is defined as the type of loan provided to the borrower, which indicates the need for large amounts of funds, by the coming together of two or more credit institutions, and usually by determining a common representative under the leadership of one of the institutions. 

            Examples of this loan usually arise as a result of the borrower's search for other banks to participate in the loan to provide this loan in order to distribute the risk to be assumed by the bank if the borrower's needs exceed the bank's credit limit or even if this limit is not reached. Syndication is a technique that allows to distribute the risk arising from the act of lending. Since this type of loan is international in nature, it allows different banks or credit institutions to cooperate in legal terms. The lower limit of this type of loan is considered to be ten million US dollars ($ 10 million). The main reason for this is that studies on syndication require a long time and effort. Unlike other international debt instruments, syndicated loan is not subject to any confidentiality rule and is announced in all world financial markets. It is also a situation that affects the reputation of banks, as banks go through major international rating steps in order to get this loan. Even if the details of the contract are confidential, the summary of the general outlines, the relationship and conditions of the loan are published in the financial markets. In addition, syndication loans have a positive effect on foreign trade.

            The elements of syndicated loan can be listed as follows: 

·                 Participation of more than one credit institution or bank
·                 Validity of similar terms and conditions for all credit institutions 
·                 Common documentation
·                 Representative proxy
·                 Variable interest rate             
 
SYNDICATED LOAN AGREEMENTS 

            In order to carry out the loan process, in other words, to enter into the loan process, a contract must be made between the bank and the real and legal person requesting the loan. Syndicated loan agreements contain all the essential elements of other loan agreements and also contain special elements. 

            Since the parties to the agreement are generally credit institutions or banks belonging to the legal system of different countries, Syndicated Loan Agreements are closely related to the law of the states. Contracts to be made in accordance with International Private Law regulations are designed in accordance with the rules of certain legal systems to the extent determined by the parties. While determining the legal system to be adopted in syndicated loan agreements that contain foreign elements and many international relations, although the parties put their own interests first, it is the common interest that must be observed. For this reason, adopting the legal system of a country that is accepted as a trade center will provide convenience in the international sense.

            The main purpose of the loan agreement is to regulate the commercial relationship by revealing the commercial provisions of the loan, to clarify how the process will work and all possibilities regarding the process, to regulate default and similar issues, to prevent conflicts and to determine responsibilities between the parties.

            With the Syndicated Loan Agreement, it is necessary to determine the law to be applied and the resolution authority in a possible dispute due to the possibility of the parties being members of the law of different nations. 

            The parties are grouped as the borrower and the lender/lenders, and it should be arranged in a way that clearly states the responsibilities and the identity of the representative designated to manage the process. In the contract, the duties of the representative can be explained one by one, or the expected benefit and purpose can be explained by drawing a general framework. If there is a difference in the structure of the loan as a result of the large number of lenders, such as different maturities, then the terms and conditions of each loan may not be regulated in the same way. Lenders can be named in different statuses according to their shares in the loan. For example; “leading bank”, “participant” etc. 

            Every organization that is a party to the syndicated loan agreement is responsible for the amount it has committed in the agreement. The organization that pays the amount specified on its behalf in the joint document, which is one of the elements of the syndicated loan, will be freed from responsibility. However, if the debtor does not make a payment to any of the parties of the syndication or cannot pay the promised amount, it will be deemed not to have paid all the creditors.   

            Syndicated loans are grouped into different types according to their formation and the borrower's loan needs. According to their formation, syndicated loans are divided into direct, participation and mixed loans, while loans according to the needs of the borrower are called fixed-term, revolving and collateral. 

SYNDICATED LOAN USE PROCESS

            Syndicated loans are privileged loans in terms of their structure. These loans, which are subject to a different lending process, consist of offer, allocation, use, follow-up during use and repayment steps. At the stage of formation of the syndication, the negotiation and preparation process take place between the debtor and the regulatory agency or institutions that will give the loan. At this stage, the purpose for which the loan is requested and which project or purpose it will be used for are discussed, and in this context, a preliminary contract is prepared in which the maturity, repayment and related details are arranged. The regulatory credit institution under the name of the lead bank makes a list of credit institutions that can be invited to syndication in the context of this preliminary agreement and invites them to syndication. 

            The institution, which is the leading bank in the syndication process, will try to persuade the institutions that will support this borrowing in the market by using the documents they have prepared jointly with the debtor, to become a party to the loan agreement by using its own reputation. If the lead bank does not choose to participate in the syndicated loan agreement in the next process, a bank will be selected as the Agent Bank and will be assigned to follow the process, and its responsibilities will be determined by the contract. It should also fulfill its responsibility by managing the repayment process. 

CONCLUSION 

            Syndicated loan is a large-scale loan that has more special and advantages compared to other loan types. The parties should understand the results and responsibilities of the Syndicated Loan Agreement, realize the receivables and debts they are undertaking, and realize that although being a party gains prestige, failure to comply with the commitment will also lose prestige, and act accordingly. Syndicated loans, which contribute to countries financially and economically, are also taken by Turkish Banks. The ability of Turkish banks to obtain syndicated loans in accessible ways from international financial markets will strengthen Turkey in the global banking sector and increase the recognition of Turkish banks.