The rationale for loan syndication

The Ghana Cocoa Board has achieved an enviable distinction of raising more than US$1 billion per year over the last couple of years to finance cocoa purchases during the major and minor crop seasons.

In the past year, Cocobod touted its credentials with its ability to raise about US$1.8 million from its financiers in a syndicated loan transaction.

For the first time, Cocobod brought on board a significant number of local banks to participate in the syndicated loan transaction which had hitherto been made up almost exclusively of foreign banks.

With the enactment of the Ghana Infrastructure Investment Fund (GIIF) Act, the government has signalled its intention of moving away from financing certain infrastructural projects which are able to pay for themselves from normal budgetary allocations. It is envisaged that the promulgation of the GIIF Act opens a lot of prospects for local commercial and investment banks to consider seriously the co-ordination of their efforts in loan syndication transactions for the financing of massive infrastructural projects. Successful loan syndication transactions will ensure increased profitability of banks.

What is loan syndication?

Loan syndication is a situation where a number of banks come together to make a loan for the execution of a project, often large projects like power plants, airports, harbours, railways etc. Such projects eventually generate the necessary returns to pay back the loans which are advanced for their execution.

The reason for syndicated loans is that normally, the sums required are so huge that the one bank alone may not be able to provide it.

Furthermore, it is also risky for one bank to take up the entire financing of a project as it may wipe out its primary capital.

Not long ago, the managing director of a leading commercial bank was forced to step aside by its board of directors for acceding to the request for a large loan to finance a major infrastructural project without reference to the board. GCB Bank until its partial divestiture was made to bear the financing of Ghana’s crude oil imports. This became a huge burden on GCB Bank as it almost wiped away its primary capital and limited its ability to extend credit.

GCB Bank’s situation was ameliorated when the then Finance Minister, Dr Kwabena Duffour, reimbursed GCB Bank with GH¢440 million. Having regard to the huge financial outlay involved in financing crude oil imports, it would have been better for the deal to be done through loan syndication. 

Steps in loan syndication

A loan syndication commences with the borrower setting out the details of its financing requirements and appointing a manager which is often called the managing bank or lead manager to manage the syndication. The managing bank prepares an information package on the loan, called the memorandum which is circulated among potential participation banks.

The managing bank is involved in all aspects of the loan syndication including acting as the intermediary between the lender and borrowers, co-ordinating all aspects of the loan syndication, conducting negotiations with all parties on the loan syndication etc.

The lead manager, after finalising all the processes involved with the loan syndication, then issues a press release signalling the finalisation of the syndication after which the draw down for the loan begins.

One key ingredient in loan syndication is the publication of an information memorandum by the lead manager. Like a prospectus which is normally circulated to potential shareholders when a company is raising capital, the information memorandum provides valuable guidance to all potential participating banks on the rationale by the borrower in raising the syndicated loan.

The information memorandum enables the participating banks to make a reasoned analysis of the loan and informs their willingness to participate in the syndication. 

Contents of an information memorandum

The information memorandum include information on the amount, term and purpose for the loan, the financial position of the borrower, information on the borrower’s financial statements including balance sheet, profit and loss accounts etc.

Other information in the memorandum include the borrower’s capital and expenditure forecasts, internal management details, country risk exposures as political risk, exchange rate risk etc and also an analysis of the borrower’s competitors among other factors. 

In some countries, it is a requirement for the information memorandum to be registered with the financial authorities. This has the purpose of affording the financial authorities the opportunity to superintend over the whole transaction to ensure that no fraud is committed and also that the objective in raising the syndicated loan is strictly adhered to.

The managing bank’s obligations on syndicated loan

Just as a broker representing a prospective shareholder has a responsibility to ensure that the prospective shareholder makes a decision on the strength of representations by the broker, so is the managing bank also fixed with the obligation to ensure that the requisite information is furnished to the participating banks to ensure that they have the right information to guide their participation in the syndicated loan transaction.

The lead manager has to ensure that the right information as contained in the information memorandum is passed on to the participating banks.

The managing bank is liable for fraudulent misrepresentation or misrepresentation simpliciter if it provides any information in the information prospectus with a view to misleading any participant in the syndication transaction.

However, due to the complexity of the transaction, it is important for the managing bank to extricate itself from any situation that may impose a liability on it for any losses which may be incurred by any of the participating banks especially relating to any criminal liability.

Typically, the lead manager may seek to exclude liability by stating in the information memorandum that it does not vouch for the information provided by the borrower and therefore is not in a position to warrant their accuracy or that it is not providing a credit reference on the borrower or that the summaries on documents provided by the borrower must not be relied on exclusively by the participating bank.

Most importantly, the most veritable liability by the managing bank would be a clause requiring that each participant has made an assessment of the borrower’s position and does not rely exclusively on information provided by the managing bank.

Another clause limiting the liability of the managing bank would be a requirement that the participant has monitored and assessed the financial viability of the borrower in accessing the loan and that it is participating on the strength of its own assessment. 

The role of the agent bank in loan syndication  

The loan syndication transaction is a chain involving a number of actors, the most important of whom are the managing bank and the agent bank.

While the managing bank is responsible for initiating the loan syndication transaction on behalf of the borrower, the agent bank also assumes responsibility along the chain of transaction. The agent bank, it seems actually “births” the transaction while the managing bank ‘‘midwifes’’ the transaction.

Even though no marked distinction can be made between the duties of the managing bank and agent bank in the loan syndication transaction, it could be said that the duties of the agent bank relate to the following. It receives the proceeds of the transactions, verifies documentation on the transaction, perfects securities, setting interest rates and publishing notices among others. — GB

Conclusion

It can be observed that loan syndication is an important transaction in the banking business.

This is because it affords borrowers the opportunity of leveraging resources to execute big ticket transactions to accelerate economic development.

Having regard to the successes achieved by COCOBOD in its loan syndication transaction for cocoa purchases, it is advised that the government should employ it as a tool for financing big infrastructural projects to accelerate economic development.

The writer is a lawyer with specialisation in international business law.