What is Debt Syndication?
Debt syndication is also known as Loan syndication. This is a type of loan in which the borrower borrows the money from various lenders in the market. Majorly various corporate, governments, and individuals borrow this loan for the funding for huge projects; which can be difficult for the single lender to lend money. This happens most frequently when the borrower needs a sum that is too high for a single lender to offer or when the loan is beyond the risk exposure level of the lender. As a result, several lenders form a syndicate to provide the lender with the funding needed. The lenders in the loan syndicate share the risk and are exposed to their part of the loan only. It may be a blend of various types of loans, each with different repayment conditions that are negotiated between the lenders and the borrower during agreements.
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Need for Debt Syndication
Nowadays the business is expanding very rapidly and for the same reason, we need additional financing. Firms are pursuing corporate loans for a number of business purposes and capital expenditure ventures. Especially in India, many companies have faced the problem of raising the fund for their projects. For this reason, many investors try to go for Debt syndication for their projects. Debt syndication has opened a new market in India and because of the rapid change and growth in the economy has been observed. By borrowing syndicate, loan owners have alternative methods to raise funds for their companies without having to dilute their ownership. The increase in the availability of syndicated loans will prove to be a boon for many corporate and entrepreneurs in the market who are in the requirement of funds for their respective businesses. Syndicated loans are a win-win situation for both lender and the borrower. For example, some of the large financing deals in India in the last decade were syndicated project financing for large power plants, large refineries, steel plants, and funds raised for acquisition financing. This could have been made difficult to complete without debt syndication.
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Advantages of Debt Syndication
- Debt syndication is beneficial for the borrowers, who get the required money for their working capital, growth, expansion, and other financial needs.
- The biggest benefit for the lenders is that the risk gets spread out across the board.
- Anybody that has paid syndicated loan successfully in the past automatically builds a good image in the market. Positive reputation reinforcement is a great advantage of borrowing through debt syndication.
- Debt syndication can be in different types of loans and currencies by different lenders. The diversity in the loan types leads to various kinds of interests namely fixed or floating interest rates when the loan is borrowed in different currencies, it protects the borrower from external aspects such as government laws, policies, and inflation.
Debt syndication has played a very significant role in the development of the economy. In recent years various multipurpose projects had been started in the country with the help of debt syndication because for any single lender it is not possible to lend that much of finance. For instance, the equity market in India has traditionally been quite active and, compared to developed markets, the size of the corporate debt market is very small. The potential of this debt market is widely unexplored and the debt syndication mechanism can resolve a host of such challenges and play a vital role in bridging the gap.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently studying an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. She is fascinated by the financial market and has a strong interest in data analysis.