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.

Syndicated loan and other types of external financing

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.

The role of a financial advisor in obtaining a syndicated loan

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.

Stages of obtaining a syndicated funding for a large project

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.

Syndicated loan standard terms and conditions

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.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
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Careful selection of the most effective financing of large investment activities and financial instruments for corporate groups seeking to expand their business.

A characteristic feature of globalization is the concentration of financial potential through mergers, acquisitions, or the purchase of shares of entities operating in the market.

The globalization of international capital markets is facilitating the creation of multipurpose structures commonly referred to as holdings in the financial literature.

The purpose of the article is to provide a brief overview of funding sources for holdings with an emphasis on intra-group funding. The classification and the most important features of the methods of financing the investment activities of groups of companies are described in detail.

If you are interested in financing large investment activities or are looking for professional consulting services, contact the financial team of CP Finance UK FINANCE.

Traditional sources of financing of large projects

Holdings use traditional sources of funding, but the complexity of the corporate group structure provides more opportunities in this regard.

In addition to traditional loans, groups of companies can use corporate tools that are not available for single companies that operate independently.

Funding sources can be divided into four main groups:

• Funding through contributions from founders.
• Self-financing through profit and amortization.
• Debt financing (loans).
• Hybrid financing.

Funding at the expense of the founders consists in the contribution of free funds by investors and shareholders to the capital of the company.

This form of financing for large companies encompasses sources such as share capital contributions, proceeds from the sale of shares in excess of par, venture capital and investor money.

Self-financing usually consists of using profits and depreciation charges from existing tangible fixed assets and intangible assets to finance the company. This source is considered the most accessible, mainly used for growth and business development.

Debt financing, which is a popular source of financing, means the use of loans, issuance of debt securities and trade credits in financing of large investment activities

This includes various project finance tools.

Hybrid finance is a combination of different forms of finance with a particular focus on traditional instruments and derivatives.

This means that one form of financing can be replaced by another. Most often, this is the replacement of debt financing with equity financing (purchase of bonds with the option to repurchase the issuer’s shares).

Corporate financing of investment activities of subsidiaries included in holdings

Corporate financing of large investment activities within a group of companies can be divided into the following categories:

• Internal financing in the form of the purchase of shares of one of the companies by another company within the group and the issuance a loan to one of the companies of another.

• External financing, which is carried out by attracting capital from interested investors or financial institutions from outside.

The above forms of financing corporate groups are presented in Figure 1.

Internal financing in a group of companies is the main tool for managing holdings.

The parent company, based on the chosen global strategy and financial strategy, determines the development directions of the entire holding, including the choice of:

• shares purchased and resold by subsidiaries or sub-subsidiaries;
• the degree of participation in the capital of subsidiaries and the level of internal financial support of these companies in the form of attracted external capital;
• financing mechanisms for each company in the holding.

If the parent company is the source of internal financing, then, depending on the form of capital provided to the subsidiary and the method of its transfer within the group, four financing options can be distinguished:

1. Equity capital remains internal capital, for example, by increasing the share capital of subsidiaries from the capital of the parent company.
2. Equity becomes external capital by providing strong guarantees to the subsidiary with the capital of the parent company.
3. Borrowed capital becomes equity, for example if the parent company takes out a loan to increase the capital of the subsidiary.
4. The borrowed capital remains external capital if the parent company takes out a loan and subsequently transfers it to the subsidiary.

The level of participation of the parent company in subsidiaries (see the first and third of the above-mentioned options for financing the holding) is closely related to the company’s profit distribution policy.

We are talking about the payment of dividends to the parent company and other owners of shares and securities of this company. In particular, it is possible to keep the profit inside the subsidiary.

Similar options can be considered when the subsidiary is funded by another company in the group.

If we assume that the subsidiary finances the activities of other companies, then the so-called capital pyramid effect may occur within the holding.

This is manifested in the fact that the parent company’s control over lower-level companies becomes disproportionate to its real financial participation.

External financing of large investment activities in a group of companies means that subsidiaries and sub-subsidiaries independently raise capital from outside.

Here we can talk about the traditional forms of financing for independent companies. In this form of financing, there is a problem with determining the degree of financial freedom of the companies included in the holding.

In some groups, external financing of large investment activities is arranged by the parent company or through a specialized finance company.

The centralization of decision making at the holding level is in line with the expectations of external capital providers seeking to assess their risk taking into account the capital ties between companies within a single corporate group.

The pyramid effect assumes that all subsidiaries will independently incur debt obligations outside the group, having their own capital at their disposal. This situation can lead to multiple uses of the same capital in different credit processes until the so-called pyramid effect is created.

The latter is extremely dangerous not only for lenders, but also for business owners. The company may become insolvent as a result of poorly assessed risk associated with growing indebtedness.

Sources of financing for investment activities of holdings in the context of centralized decision-making

Financial experts classify funding sources for corporate groups according to the degree of centralization of corporate decision-making authority into centralized, decentralized, partially centralized and mixed sources.

Each of them provides companies with unique advantages, but they have certain limitations in practical use.

Decentralized financing of  large investment activities of holding companies occurs when each division of the group acts as a separate debtor, taking on the burden of collateral and debt repayment. This prevents the group from taking advantage of the financial synergy effect and, therefore, the companies attract fewer resources.

In this form of financing, the decision-making power of the parent company is limited solely to determining the level of its capital obligations in the subsidiary and deciding on the distribution of profits. The parent company monitors the financing result using corporate governance instruments and on the basis of financial statements sent by the subsidiary.

The advantage of decentralized finance is that it is strongly linked to the development of each borrowing company.

However, this method of organizing financing severely limits the potential benefits that the group can receive from the cooperation of companies in this area.

Centralized financing of large investment activities of a corporate group refers to the financing of one company in a group through another company in the same group.

It is most often dominated by a stronger company with a high creditworthiness, which attracts borrowed funds (loans) in order to finance weak companies.

This form of financing also means that any financial decisions within the group are made by the parent company. The parent company, in addition to determining the level of its capital liabilities in each company, decides to use other forms of internal financing, regulates equity participation in these subsidiaries, determines the capital structure and raises capital from outside.

The centralization of financing of large investment activities are aimed at obtaining the maximum benefit from the cooperation of companies, measured by the lower cost of capital in the investment activities of the holding. This approach also means a significant increase in the parent company’s supervision over its subsidiaries.

On the other hand, the use of centralized financing means the risk of a significant increase in the costs of financing processes in the group of companies, as a result of the complexity of decisions taken at the central level.

Some sources also mention the high risk of neglecting financial needs, as reported by some companies.

Funding for holdings can be partially centralized. In these cases, a company interested in raising capital itself applies for it, and the role of other companies in the group is to provide guarantees and sureties.

Mixed financing is characterized by the use of joint decisions of the parent company and the subsidiary to finance the latter. The need for financing of subsidiaries is determined by them independently, but each such decision must be preceded by the approval by the parent company of methods to cover financial needs in the context of the global economic goals of the corporate group.

With this method of financing, a special financial company can be created, responsible for the attraction and distribution of financial resources.

There are several types of financial companies, including those listed below:

• A company that finances the rest of the holding companies only in the form of external capital. A subsidiary of the parent company is created, which itself does not have stakes in other companies, its capital often does not exceed the minimum level required to create a legal entity, and its creditworthiness is guaranteed by the parent company. The purpose of this company is to raise and distribute capital between the companies of the group.

• A company that finances other companies in the group in the form of external or equity capital. It is also a subsidiary company, but shares of the parent company in other structural units are transferred to it, which also implies the establishment of some responsibilities for the management of the holding.

CP Finance UK FINANCE LIMITED
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