Introduction to Corporate Finance

PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY

give their holder the right to purchase a certain number of the company’s ordinary shares at a specified

price during a certain period of time. They are designed to entice institutional lenders to make long-term

loans, possibly under relatively favourable terms. Warrants are also frequently used as sweeteners for

corporate bond issues.

Term Lenders

There is a wide array of sources for term loans. The primary lenders making term loans to businesses

are commercial banks, insurance companies, superannuation funds, regional development companies,

small business investment companies, commercial finance companies and equipment manufacturers’

financing subsidiaries.

14 -2b SYNDICATED LOANS

A syndicated loan is a large-denomination credit arranged by a group (a syndicate) of institutional lenders,

commonly commercial banks, for a single borrower. Although syndicated lending has been a fixture

of finance for over three decades, syndicated loans have increased dramatically in size, volume and

importance during the past 20 years.

The syndicated loan market appeals to borrowers who need to arrange very large loans quickly. Loans

for top-tier corporate borrowers are floating-rate credits with very narrow spreads (10–75 basis points)

over the BBSW or LIBOR. Typically, lenders structure these loans as overdrafts or lines of credit that

borrowers can draw down as needed over several years. After that time, the loans generally convert to

term credits that companies must repay on a set schedule. One increasingly important use of syndicated

lending is to fund debt-financed acquisitions by corporate borrowers, where the ability to borrow large

sums quickly and (relatively) discreetly is especially valuable.

Though syndicated loans are used for virtually all types of corporate finance, there are two uses that

merit special discussion: Eurocurrency lending and project finance.

Eurocurrency Lending

The Eurocurrency loan market consists of a large number of international banks that stand ready to

make floating-rate, hard-currency loans (typically, US-dollar denominated) to international corporate

and government borrowers. For example, a British bank that accepts a dollar-denominated deposit in

London is creating a Eurodollar deposit, and by then re-lending that deposit to another bank or corporate

borrower it is making a Eurodollar loan. These loans are often structured as lines of credit on which

borrowers can draw. Most large loans (over $500 million) are syndicated, thereby providing a measure of

diversification to the lenders. Eurocurrency syndicated loans sometimes exceed $10 billion, and loans

of $1 billion or more are quite common. Furthermore, in total size, the Eurocurrency market dwarfs all

other international corporate financial markets.

example

SYNDICATED LENDING AND INFRASTRUCTURE FUNDING EXPANDS

DBS Bank, Southeast Asia’s largest bank, officially

launched operations in Sydney, Australia,

expanding its presence to 18 markets around the

world. With the branch, DBS will better facilitate

business and investment flows between Australia

and Asia.

LO 14.2

syndicated loan

A large-denomination credit

arranged by a group (a

syndicate) of institutional

lenders, commonly commercial

banks, for a single borrower

Eurocurrency loan

market

A large number of

international banks that

stand ready to make floating-

rate, hard-currency loans to

international corporate and

government borrowers

Benjamin Esty, Harvard

University

‘The syndicated loan

market is now the

largest single source of

corporate funds in the

world.’

See the entire interview on

the CourseMate website.

Source: Cengage Learning

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