Question

What are Syndicated Loans? Why do you think that there has been an increase in their use, particularly in Australia?

Answer 1

Syndicated loans are loans where a group of lenders come together to offer a financial facility to the borrower. Loan syndication thus spreads the risk across multiple lenders.

Over a period of time, there has been an increase in their use, particularly in Australia mostly because of the following reasons:

• Average borrowing ticket size has gone up. The needs of the corporate have been larger than before. A single lender may not be able to take up such a big exposure in a single corporate or a group. Hence, consortium of lenders emerged as natural choice.
• To avoid concentration risks: Lenders have burnt their fingers in the past and they now want to avoid concentration risk. They therefore prefer a smaller ticket size per borrower and want to bring more borrowers under their base. This way they are able to reduce their risk profile or able to diversify themselves.
• The projects in Australia are becoming more capital intensive (Recall manufacturing, mining, ferrous and non ferrous activities going up in recent times). The increasing capital intensity is met by a group of lenders pooling together, thus giving way to syndicated loans.