How to Evaluate Syndication Loans

If a bank receives a loan application that it considers too large or too risky, it may process the loan as a syndication loan. A syndication loan is held by multiple lenders, known as a syndicate. This divides the risk of the loan between the lenders and reduces their total loss exposure. A syndication loan is usually held by a group of banks, but other large financial institutions can be lenders in a syndication loan. When a bank evaluates a syndication loan, it must review the credit risk of the borrower and the potential to divide the loan with other lenders.

Things You'll Need

• Credit reports on the borrowing company
• Financial statements of the borrowing company

Instructions

1. Purchase your borrower's credit rating report from a third-party rating agency, like Moody's or Standard & Poor's. This report discusses the current financial status of the borrower and outlines its potential risks to lenders.

2. Request a copy of the borrower's financial statements as part of its loan application. Financial statements are accounting statements that presents the borrower's current assets and liabilities, its annual income, and its net cash flows.

3. Review the borrower's net cash flows over the past. Compare the borrower's historic cash flow with the necessary monthly debt payments of your loan. Look for any interruptions in cash flow or market downturns in the company's income. These could prevent the borrower from making loan repayments in the future and increase the risk of the loan.

4. Review the borrower's assets for any potential sources of collateral. Collateral can include any cash, real estate, equipment or stock held by the borrower. If you do not think the borrower's cash flow is safe enough to support the loan, ask the company to use some of its assets as collateral.

5. Determine how much of the loan your bank is comfortable holding on its own based on your bank's risk standards.

6. Contact other banks, and ask if they would like to take a portion of the syndicate loan. Increasing the number of lenders taking on the loan reduces your total risk exposure but also reduces your total profit.

7. Decide on the loan division with the other banks and complete the syndication agreement. Present the completed loan to the borrower.

References

• Risk Glossary: Syndicated Loan
• Small Business Notes: How Banks Evaluate Loan Requests