One of the preferred options for financing a businesses and capital intensive projects is the so-called syndicated loan.
Companies often face the challenge of finding funds to finance large projects, especially when it comes to multi-billion dollar infrastructure, industrial or energy projects with a long construction period.
At the planning stage, our clients must decide whether to use equity capital, finance a project with the help of business partners, shareholders, investors, or use loans from banks and other financial institutions.
Do you know how to use this financial instrument?
If you are planning to implement a large investment project, contact CP Finance UK FINANCE for advice.
Our team has extensive experience in financial modeling and project financing.
With the support of our high net worth angel investors and financial institutions, we can help you finance the construction of a solar power plant, wind farms, waste recycling plant or other capital-intensive facility on the most favorable terms.
According to the World Bank, financing large projects is a major challenge for fast growing economies.
Today a business can choose the following sources of project financing:
• Leasing.
• Factoring.
• Issue of shares and bonds.
• Bank loans, etc.
Syndicated loan and external financing instruments have different purposes and usually mean different costs for the companies that use them.
All of the above sources of project financing can be used in various combinations, based on the characteristics of a particular business.
Despite the existing possibilities of obtaining funding from various sources, loans should be the basis of external financing for projects, and other sources should be considered as complementary.
Any major project requires a significant flow of funds, which must flow on a clear schedule to ensure the continuous operation of numerous contractors and subcontractors, manufacturers and equipment suppliers. Depending on the schedule, companies can use different sources of funds at certain stages of construction or operation of the facility.
A bank loan is a common form of external financing for large projects.
Due to the variety of forms of lending, this tool can be easily adapted to the individual needs of a particular company. It is also one of the cheapest sources of capital.
Thanks to close cooperation with high net worth angel investors and some other European countries, CP Finance UK Finance can assist clients in obtaining a long-term syndicated loan on attractive terms.
A syndicated loan is a long-term loan usually used to finance a specific project.
The main features of syndicated financing are listed below:
• Long term maturity: usually several years, but there are known examples with maturities up to several decades, especially in the oil and gas sector, energy and environmental projects.
• The loan is intended to finance specific activities, including the construction of a new thermal power plant or laying of a gas pipeline.
• The funds are partially provided in the form of a revolving loan up to a certain limit established by the agreement.
A syndicated loan is a highly customized financial instrument, which means there are no strict rules.
Loan agreements are very flexible and take into account the specifics of each company, its financial health and market position.
One of the features of a syndicated loan is its wide application in project financing. In these cases, the loan amount often exceeds the value of the assets of the entire enterprise, therefore banking institutions tend to apply very restrictive loan agreements.
Obtaining a long-term syndicated loan exceeding the value of the company’s assets within the framework of project financing is possible if several conditions are met:
• The industry in which the borrower operates is very stable and shows good development prospects (for example, the renewable energy sector).
• The borrower receives guarantees from partners or the contract includes other conditions for recapitalizing the company in the event of certain events.
• The syndicated loan is secured not only by all the assets of the given company, but also by the future cash flows of the project.
In addition, banks usually reserve the right to unblock subsequent loan tranches only when certain events occur.
For example, the allocation of the next part of funds becomes possible after the completion of a certain stage of construction.
Such agreements are usually concluded for significant amounts of financing, incomparably larger than in the case of traditional loans received from one bank. This is explained by the concentration ratios established by law per organization and the internal policy of banks regarding financing a specific sector.
In the case of a large loan, one bank may not be able to provide sufficient funds to implement the project on its own.
The first reason is that the bank runs the risk of violating the legislation, which in some countries imposes strict limits on the concentration of funds for one legal entity or even a sector.
On the other hand, each bank develops its own procedures (some of them even more stringent than national laws) that govern how much funds can be allocated to a particular enterprise or sector. For the combination of these reasons, banks are showing a willingness to organize syndicates in large projects.
An exception to the rule is financing provided in recent years by some Chinese banks, for which it is generally considered unusual to finance large investments by a single institution. Examples of this approach are financing telecom projects in Europe and financing large mining sector projects in Africa and South America. However, these decisions are often made in a centrally controlled economy and are usually aimed at bringing certain products to this market (usually projects are associated with Chinese manufacturers).
In the European context, the amounts of syndicated loans range from several tens of millions to several billion euros.
The largest syndicated loans in the EU are usually issued in the energy and infrastructure sectors, where the loan amount can exceed 1 billion euros.
Such large amounts require special conditions for the distribution of funds and control over their subsequent use. These conditions are determined long before the conclusion of the loan agreement itself and require special preparatory measures.
High-quality preparation and organization of project financing is the first and most significant step in this process.
Company managers need to understand that preparation determines the subsequent success of the entire operation, and the better your company is adapted to the demands of the financial markets, the sooner and on better terms the process will be completed.
When your company first enters the syndicated finance markets with a major project, it is advisable to hire a financial advisor from the start. Such advisory functions are performed by renowned European and American banks such as Merryll Lynch, Goldman Sachs, JP Morgan, Citibank, Deutsche Bank, RBS, West LB and many other world famous brands.
In addition, you can hire a financial advisor from companies that are professionally engaged in such activities, such as Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, TDI Corporate Finance, etc. Of course, the cost of such services from market leaders can be very high.
CP Finance UK FINANCE is ready to provide businesses with a full range of advisory services, including financial modeling, selection of optimal funding sources and assistance in obtaining a syndicated loan on favorable terms.
The financial advisor is usually selected through a competition announced by the company.
His role is to guide the company through the entire financing process in an optimal way. However, this is often limited to optimization of the financing structure without legal advice.
The consultant’s fee depends on the loan amount. For the largest loans of about 1 billion euros, this fee can amount to hundreds of thousands of euros. The advisor’s excellent knowledge of the financial market (both domestic and international) will be an advantage for the borrowing company.
The role of a financial advisor in obtaining a syndicated loan:
• Conducting a detailed analysis of the financial market. Choosing the most appropriate moment to enter the market to obtain a loan on the best terms.
• Selection of alternative sources of financing for the project, which will supplement or replace the syndicated loan. Determination of the most suitable banks or financial institutions to manage funds. Providing a list of institutions interested in the project.
• Professional assistance in drawing up a business plan at the request of the bank. Execution of official documentation and negotiations with interested parties.
Only companies that have experience in syndicated financing or are part of an international group using such financing can enter the market without the assistance of a financial advisor.
Preparing documents and arranging syndicated financing usually takes more time than applying for a loan from one bank.
A simple contract with standard market terms can take up to 3 months to prepare, while more complex options can take 6 months or more.
At this stage, a professional financial consultant helps to clearly divide the organizational process into several stages with deadlines for their implementation.
In general, the stages of obtaining a syndicated loan include:
• Hiring a financial advisor (optional).
• Selection of proposals, selection of the organizing bank for the consortium and signing of a mandate letter (a document authorizing this bank to organize a syndicate on agreed terms). In some cases, it is possible to sign an underwriting letter, a document guaranteeing a company to organize financing on agreed terms.
• Drawing up a project financing schedule, taking into account the specifics of a particular business, technical and other possibilities for the implementation of a particular project.
• Prepare a term sheet, a document that contains a funding request detailing the financial needs of the borrower.
• Preparation and signing of an information memorandum.
• A syndication process for arranging financing on specified terms.
• Selection and signing of an agreement with a law firm.
• Development of a loan agreement and approval of collateral.
• Obtaining the necessary official and legal approvals.
• Signing the agreement.
Below we describe the most important stages of syndicated financing.
Financing large projects through a syndicated loan requires the borrowing company to strictly comply with numerous requirements throughout the term of the agreement.
This includes informational, financial, legal or other obligations stipulated by the relevant contract.
Particular attention should be paid to the events of default prescribed in the agreement, which can jeopardize the position of the lender or borrower. In general, in the case of obtaining a syndicated loan, the borrower has to provide a little more information than a regular loan.
Disclosure obligations are limited to standard reports such as quarterly and annual reports, often requiring audits. You may need to provide much more detailed reports. The amount of this information is usually agreed upon at the stage of signing the contract. In addition, the company provides its budget and long-term business plan.
In addition to standard reporting on project finance, banks may require permission to change a company’s business profile, an obligation to apply for consent (waiver) in the event of a merger with another legal entity, the creation of subsidiaries, and many others.
Bank requirements depend on many factors, including the following:
• The size and position of the company in the market.
• The amount of the syndicated loan and its maturity.
• History of cooperation with agent bank.
The agent bank is the financial institution through which the company contacts the rest of the syndicate.
Thus, the bank acts as a coordinator between the borrower and the funding banks.
The agent charges a commission for this service. This commission is also negotiated before signing the loan agreement and usually does not exceed 100 thousand euros per year, which is quite a sufficient amount for a large syndicate.
Further responsibilities of the borrowing company should include maintaining certain financial ratios within specified limits.
The most common indicators in loan agreements include:
• Debt / EBITDA ratio. The lower the number, the better. The level considered safe is between 0 and 1, and the indicator above 2.5 is usually considered dangerous for the company. However, this scheme should not be considered final, because, as is the case with many other financial indicators, a lot depends on the industry.
• EBITDA / debt service. This figure should be high. An indicator below 1.5 is considered dangerous, and at a lower level, companies have problems servicing their current debt.
• Debt / equity. The lower the number, the better. It is used at the initial stage of implementation of large projects, when the company has not yet generated positive EBITDA. An indicator level above 2 is considered dangerous.
The syndicated loan provides stable financing at relatively low costs. Preparation in this case is extremely important, since the subsequent success of the entire operation often depends on professional planning and competent paperwork.
When using syndicated financing, companies should maintain certain ratios within specified limits. These actions are in the best interests of the business as it will minimize subsequent costs.
If you are looking for funding sources for a large project, contact CP Finance UK Finance at any time.
We are ready to share our experience and assist in obtaining loans from leading European banks and financial institutions.
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