Loan Syndication: How the Arranging Bank Seeks to Mitigate Risk
Summary
When capital intensive projects require more financing than any one bank can reasonably offer, or wish to offer, several banks may join together to provide the financing, a process that is called loan syndication. During the process of syndicating a loan, an arranging bank will prepare essential syndication documentation and present this documentation to lending banks as a basis for the lending banks to join the syndicate. An arranging bank bears the risks associated with any omission or misrepresentations in the syndication documentation, which may arise due to an information asymmetry between the banks. This paper focuses on the host of techniques available to mitigate the risks that arise from the arranging banks’ duty to draft syndication documentation, in particular, the Information Memorandum and Loan Agreement. This paper finds that although there are techniques used by the arranging bank to seek to limit its liability and shift risk from the arranging bank to the lending bank(s), in practice the behaviour of the lending bank(s) may result in a concentrated syndicate structure such that a majority of the financing risk is, in fact, retained by the arranging bank. Risk mitigation by the arranging bank is only partial but is a rational result of (perceived) information asymmetry and other factors, including indemnification.