DCM: Syndicated loans Flashcards
what is an spv?
special purpose vehicle, a company founded to obtain a single precise scope. (ex HKITP limited for the disney hong kong case)
what is an RCF? what is it usually employed for?
revolving credit facility, is a loan that can be used multiple times and withdrawn at different times. for example if you have a revolving facility of 1bn and withdraw 300M, you still have 700M you can borrow anytime you want, additionally if you repay the 300M principal you could borrow potentially the entire sum of 1 bn. revolving credit is usually used to face working capital needs.
how do practitionaers refer to the 2 shares that compose a RCF when it is being used?
drawn and undrawn part, the undrawn part has been committed but not yet borrowed and therefore doesn’t show on the BS of the borrowing entity.
what are the means through which an SPV might repay a loan?
operating CFs and collateral. lenders CANNOT require payment from the sponsors and can only rely on CFs from the project.
what is a term sheet?
a legal document containing all preliminary conditions for a loan, drafted in a preliminary stage and turned into a contract at a later stage. it is used to call for a proposal from various banks and therefore doesn’t contain any indication on fees and interest, banks are allowed to bid on those after receiving the term sheet.
what clauses does a term sheet usually contain?
General
-maturity
-amount
-underwriting requirements
typical for SPVs
-no recourse (sponsor immunity)
-uses of cashflows (for expansion and CAPEX in the case)
-subordination of cashflows towards sponsors (disney refusing to subordinate management fees for the park wrt loan repayments)
how is a syndication contract adjudicated? what are possible strategies in negotiation?
by bidding lower fees and interest or more acceptable terms compared to other bidding banks.
-no bid (theoretical–> relationship matters) usually replaced by low balling
-middling bid with no fear of losing.
-bid aggressively to win or get shortlisted.
what are the 2 types of prices presented in a proposal?
fees and interest rates, some are UPFRONT: paid immediatly and una tantum at deal closing (signing of the deal) (underwriting fee, closing fee and arranging fee) and some are RECURRING such as interest rate on the loan and commitment fees.
how do you come up with a price proposal for underwriting fees?
usually industry benchmarking by examing similar transactions with similar size, sector, geography and terms.
how do you come up with a price proposal for interest rates?
usually an offered interbank rate (LIBOR, EURIBOR, HIBOR in the case) + a risk spread that can be fixed or increasing in time (step-up spread structure)
what is the rationale behind a step-up spread structure?
when you have projects that need to ramp up in production and cashflows, by introducing a step up structure you match interest payment with the growth of cashflows.
what is a commitment fee? is it upfront or recurring?
the fee you pay on the committed but undrawn amount of a loan. it is recurring. (lower than interest)
what is an MLA?
Mandated lead arranger, the bank tasked by the borrower to arrange the deal and find participants
what are the phases of a syndication process?
selection of mandated bank–>sub underwriting (optional, the lead arranger may not recur to it)–> general syndication (the syndicating banks offer part of the deal to participating banks)
what are the types of syndication strategies?
single stage syndication: from mandated bank directly to participating banks.
two-stage syndication: from mandated bank to a small subset of large banks (sub underwriters) that share the initial commitment and part of the benefits and take part in the efforts for general syndication to the market
what are characteristics of a single stage syndication? how about dual stage?
more lucrative for the mandated bank, but riskier as they are exposed to the risk of failing to raise the needed commitment. usually only available in cases of high market stability and liquidity for plain vanilla deals.
dual stage is far less risky (as MLA doesn’t bear all the underwriting commitment) and underwriting fees are shared with sub underwriters. it is used when market conditions are more uncertain and the deal is particular. Moreover, it is sometimes requested by the borrower as it reduces risk for them and often also involves relationship considerations.
what are the considerations a MLA must make when forming the syndicate?
1) how many banks you want to invite?
-smaller syndicate is easier to coordinate and grants confidentiality, however inviting many banks might instill competition and result in lower fee dilution. Additionally a large syndicate deters strategic default as default might ruin reputation vis a vis a large share of the lending market. Finally, by including more banks,
underwriters can avoid disappointing banks that
might otherwise be excluded from the deal.
2) which banks to invite?
the borrower might have a say in which banks to invite (so as to preserve good relations, eg disney and BNP paribas). Additionally, the choice is often limited to banks with which the MLA has good relationships and the choice of sub underwriters/participating banks becomes a matter of marketing and reciprocation of past invitations (oligopoly). Finally deal structure is a strong driver, you are incentivised to choose banks which are aligned in terms of geography, sectorial knowledge, currency reserves and which have the support of local institutional borrowers participating in the deal (eg hong kong)
3) how much “final take” does the MLA want to keep in the books? usually 10%, going below is risky as it acts as a signal of low confidence in the deal by the MLA, however it is highly efficient in terms of return on capital for the MLA as he receives a large part of fees based on the total commitment and not on the amount lent.
what is the waterfall of upfront fees?
the MLA receives an underwriting fee (eg 1.25% of 3.3B= 41.25M) based on the total commitment, this has to be split among sub-underwriting fees, closing fees and residual compensation for the mandated arranger. MLA participates in all fees allocated to the lower levels as well as underwriters who participate in closing fees. in the case JP reserved 0.25% for sub-underwriting fees (8.25M split among the 6 sub-underwriters and JP itself) and 0.70% for closing fees (23.1M split among all participating banks and underwriters). this resulted in 0.3% left on the table (9.9M) which went solely to JP as compensation for arranging. Additionally, different participating banks participate differently to closing fees which leaves a final leftover pool of closing fees to be split, usually at the discretion of the lead bank.
what is the size of loan in the HKTP
3.3 B HK dollars
what is a syndicated loan?
Syndicated loans involve two or morebank lenders united by a single set of legal docu-ments for the purpose of providing credit to aborrower.
what is a best efforts bid?
a partial underwriting, the bidder only accepts part of the total deal in its books and attempts to place the rest on the market.
what are the most common tiers based on participation?
Arranger, Co-Arranger, Lead Manager, and Manager
how was funding provided in the HKTP case? (28B HK dollars total)
-14B HK gov to reclaim land
-remaining 14 B was split
-2.3B by syndicated loan
-6.1B subordinated debt by the HK gov
-remaining part was split between HK gov and Disney (equity) with a 57-43 split.
How was the HKTP loan priced?
step up structure in teams of hibor spread. starting from 100BP, up to 125BP in year 6 and 137.5 BP in year 11. maturity is 15 years.
