Consortium, multiple banking or syndication?
When a requirement outgrows a single lender, the architecture of the facility becomes as important as its price.
Every growing company eventually reaches the point where its requirement exceeds what one bank will hold. How the additional lenders are brought in shapes the next decade of the relationship — the cost of administration, the speed of future enhancements, and how the company is treated if a difficult year arrives.
Three architectures
In a consortium, several lenders finance a borrower on the basis of a common appraisal, common documentation and joint supervision, usually led by one bank that holds the largest share. Under multiple banking, the borrower deals with each lender independently: separate appraisals, separate security and no contractual relationship between the banks. A syndicated loan is arranged by a lead bank that structures the facility and distributes it to participants on a single set of terms, often for a defined project or term requirement.
In October 1996 the Reserve Bank withdrew its earlier prescriptions governing these arrangements, leaving banks and borrowers to choose the structure that suits the credit. What it has insisted on since is information sharing: its circular of 19 September 2008 requires banks to exchange information on borrowers availing facilities from more than one lender.
Choosing between them
Multiple banking offers flexibility and competition between lenders, but it multiplies documentation, security creation and reporting, and the lenders have no mechanism to act together. That independence can be a weakness during stress, when each bank protects its own position.
A consortium is slower to assemble and every enhancement requires agreement, but it gives a company one appraisal, one set of covenants and a lead bank that carries its case internally. For large working capital requirements it remains the most stable home.
Syndication suits a defined, sizeable term requirement — a new plant, an acquisition, a refinancing — where speed and a single negotiation matter more than a permanent club of relationship lenders.
Relationships, not a mailing list
Each of these structures depends on lenders who already trust the borrower and, just as importantly, trust each other. That is why consortium and syndicated financing tends to be won through established relationships across several institutions rather than through a wide circulation of an information memorandum.
This article is general information about the financing landscape, current as of its publication date. It is not financial, legal or tax advice; regulations change, and every company’s position is different.
