The last type of debt we will consider is syndicated loans. These loans are granted by a group of banks organized in a so-called syndicate.
Why would banks gather in a group instead of providing loans for the entire amount?
There are several reasons for this. First, as we previously noted, some loans are too big. Banks don’t want to put all their eggs in one basket. At the same time, banks want to develop a product that provides a solid alternative to bond issuances. They know that large corporate clients are an interesting line of business. This is the reason they came up with a product like Syndicated Loans.
Essentially, this instrument allows banks to get a small chunk of a large loan and lend money to a client. In addition, when providing syndication services, banks earn commissions, especially the bank arranging the loan and contacting other financial institutions to join the syndicate called the lead bank or lead-mandated arranger.
Other banks also earn commissions since they contribute to selling and underwriting efforts. Loan syndication is an excellent process in terms of diversification. It allows banks to grant loans to borrowers located anywhere in the world.
For example, a commercial bank in Spain can lend money to a car producer in Brazil.
In this case, the Spanish bank has no origination capacity in Brazil but can diversify its portfolio through syndication. Syndication is a hybrid between commercial loans and bond issuances. The syndicate earns commissions based on book building, underwriting, and selling efforts, as in bond issuance. The primary lenders, however, are banks instead of institutional investors like mutual and pension funds.
