Syndicated Loans: Splitting a Loan Across Many Lenders

A syndicated loan is one facility, on one set of documents, funded by several lenders at once. Each lender takes a share of the money and a share of the vote, and an agent moves cash and papers between them without deciding anything. A five per cent lender is powerless where a majority decides and decisive where every lender must consent.

Hold on to one structural fact before any arithmetic arrives. Almost every confusion about this subject comes from losing it. A syndicated facility is one loan. The facility is not six loans stapled together, it is not a bundle, and the borrower does not owe six different amounts on six different sets of terms. The funding and the voting are what get divided, and both are divided inside the same document rather than between documents. That is why the interesting question is never who lent what. The question that matters is which decisions the agreement sends to a majority of the money and which it sends to every last lender. A share of the money turns into a share of the power only in the first of those two categories.

What is a syndicated loan, and why would one loan be split at all?

Consider an ordinary residential building. The lift has to be replaced and the quote is large enough that no single flat could pay it. Eight flats agree to fund it, one contract is signed with one contractor, and each flat's share is written into a schedule at the back of that contract. There is one contract, one contractor and one price. The division settles only who pays which slice of that one price, and one resident is appointed to collect the money and hand it over. Nobody thinks of this as eight contracts.

A syndicated loanOne facility funded by several lenders on one set of documents. is that arrangement pointed the other way. The borrower is the contractor in the story, in the sense that there is one of it and it faces one document. The facilityThe whole loan as the document describes it, before it is shared out., meaning the whole loan as the agreement describes it, is one number. Several lenders fund it between them, and each lender's slice is called a participationOne lender's share of a syndicated facility..

Why split it at all? Two plain reasons, and neither of them is a judgement about anybody. The first is size. A facility can be larger than any one lender is prepared to put into a single borrower, and no amount of enthusiasm changes an internal limit that has already been set. The second is concentration. A lender that puts every rupee it has into one place has nowhere to go if that place stops paying, so lenders often want less than the whole even when they could fund the whole. Splitting solves both at once, and it costs something in return: the moment there are six lenders instead of one, changing anything about the loan needs a mechanism rather than a phone call.

Who does the borrower actually owe, and on how many documents?

One document, and one amount on it. The borrower under this facility owes Rs 4,00,00,00,000 in total, on terms that are the same terms for every rupee of it, and it does not owe Nilgiri Direct Lending Fund I some private amount on private terms. The schedule inside the agreement records that this fund funded Rs 20,00,00,000 of that total, and the schedule is bookkeeping about the lender side. A schedule is not a second loan.

The distinction between one loan and six sounds pedantic until something goes wrong, and then it is the whole game. If there were six loans, six lenders could each do six different things: one could accelerate, one could wait, one could sue, one could forgive. There would be no mechanism to stop them and no need for one. Because there is one loan, the six lenders cannot each do their own thing. The single document that makes them all one lender in the borrower's eyes is the same document that forces them to have a procedure for disagreeing with each other. Every other feature of a syndicate is a consequence of that sentence.

What does the agent do, and what does the agent never do?

Go back to the building. One resident collects each flat's share and hands the money to the contractor, and later collects the contractor's bills and passes them round. The resident who collects is doing a job. The same resident decides nothing about whether the contract should be varied, whether the contractor should be given three extra weeks, or whether the colour of the lift doors should change. Decisions like those belong to the eight flats, and the collector holds no more of a say than anybody else.

The agentThe party that administers a syndicated facility, collects payments and passes them on. on a syndicated facility does exactly that job. The agent receives what the borrower pays and passes each lender its share. The agent circulates the borrower's information to the lenders, counts votes when a vote is called, and gives notices. The agent decides nothing about the loan, anywhere in this structure. A request to change a term does not get answered by the agent; it gets passed to the lenders and answered under whichever voting class the document sends it to.

Payments run pro rataIn proportion to each lender's share, so a 5.0 per cent lender receives 5.0 per cent., meaning strictly in proportion to each lender's share of the facility. Suppose the borrower pays a coupon of Rs 1,00,00,000 into the agent. A 5.0 per cent share of the facility brings this fund Rs 5,00,000. The other five lenders take Rs 95,00,000 between them. Rs 5,00,000 plus Rs 95,00,000 is Rs 1,00,00,000, and no rupee has gone anywhere except in proportion. The proportions were fixed by the schedule long before the money arrived, so the agent has made no choice at all in producing that split.

How does a share of the money become a share of the vote?

By being written down as the same number twice. The schedule that records each lender's funded share is also the schedule that measures each lender's voting weight, and on this facility that measurement is by value rather than by head. Six lenders, and the vote is not one lender one vote. The rule is one rupee one vote, counted against the Rs 4,00,00,00,000 of the whole.

Work it for position 7 of Nilgiri Direct Lending Fund I. The fund funded Rs 20,00,00,000 of a Rs 4,00,00,00,000 facility. Divide: Rs 20,00,00,000 over Rs 4,00,00,00,000 is 0.05, or 5.0 per cent of the facility exactly, with nothing to round. The same 5.0 per cent is both this fund's share of every rupee the borrower pays and its share of the voting weight on anything the document sends to a majority. The other five lenders hold Rs 3,80,00,00,000 between them, which averages Rs 76,00,00,000 each, being 19.0 per cent of the facility each.

One honest caveat attaches to that average. The case fixes the facility size, the number of lenders, this fund's participation and the fact that one of the other lenders is a bank. How the remaining Rs 3,80,00,00,000 divides among the five is fixed nowhere. Each of the five appears separately below at Rs 76,00,00,000, the average standing in for a split nobody recorded. The totals are exact, and the split among the five is a drafting convenience rather than a recorded fact about any of the five.

Which decisions go by majority, and which need every lender?

Every syndicated agreement sorts changes into classes, and the two that matter most are easy to name and easy to confuse. A majority decisionA change that binds every lender once lenders holding more than a stated share agree. binds the whole syndicate once lenders holding more than a stated share of the facility have agreed to it. Nobody who voted against gets to opt out. An all-lender matterA change that cannot be made unless every single lender consents. cannot be made at all unless every single lender consents, and one refusal is the end of it.

Notice what those two classes do to a lender's arithmetic. In the first class, a lender's power is its share of the money and only that. In the second, consent is not weighed, so share of the money stops mattering entirely. The same participation is a fraction in one class and a whole in the other, and which class a change falls into is written in the agreement before the question ever arises rather than argued about when it does. Which changes this facility puts on which list is not recorded by the case, and that allocation is the most consequential clause in the document.

What does the same Rs 20,00,00,000 do on each of the two lists?

Work both, on the same facility, on the same day, with nothing changing except the class of the question.

On a majority matter, lenders holding more than Rs 2,00,00,00,000 of the Rs 4,00,00,00,000 have to agree. The fund holds Rs 20,00,00,000, one tenth of that Rs 2,00,00,00,000 threshold and one twentieth of the facility. Rs 20,00,00,000 cannot carry a change by itself and cannot block one by itself. Take the other five at their Rs 76,00,00,000 average. Any three of them hold Rs 2,28,00,00,000, past the line, so three lenders can bind this fund to a change it voted against. Meanwhile two of them plus this fund hold Rs 1,72,00,00,000, short of the line, so the fund cannot rescue a change that two others want. On an all-lender matter, none of that arithmetic runs at all. Consent is not weighed, so this fund's Rs 20,00,00,000 counts for precisely as much as the largest holding in the syndicate, and one withheld consent ends the matter.

A participation is not one quantity of power, it is two, and the document decides which one is in play. Notice also what does not follow from the two columns. Neither column is the better place to be, and a small participation is not therefore a weak one. A veto that can stop a change cannot compel one, so it is a narrow power rather than a large one, and a lender that can be bound by three others is not thereby disadvantaged. Both facts come out of the same agreement and neither is a verdict.

When is a 5.0 per cent vote actually decisive on a majority matter?

There is a narrow window, and it is worth drawing precisely because most descriptions wave at it and move on. On a majority matter, this fund's vote changes the outcome only when the other lenders in favour hold more than Rs 1,80,00,00,000 and no more than Rs 2,00,00,00,000. Below that band, even with the fund's Rs 20,00,00,000 added, the total stays at or under the Rs 2,00,00,00,000 line, so the change fails whether or not the fund joins. Above it the line has already been passed, so the change carries whether or not the fund joins.

The window in which a 5.0 per cent holding decides a majority matter is exactly Rs 20,00,00,000 wide, exactly the size of the holding itself, and that holds for every participation in every facility rather than for this one alone. A lender holding 19.0 per cent has a window four times as wide. A lender holding the whole facility has no window at all in this sense. There is nobody else left to be nearly split. A band exactly as wide as the holding is the honest version of the sentence people usually write as a vote only matters if the others are close.

What changes when the terms themselves have to change?

A syndicated loan stops being an accounting curiosity and starts being a different animal once the terms have to change, and the clearest way to see that is to put it beside the loan sitting next to it in the same lending book. Position 6 of Nilgiri Direct Lending Fund I is a bilateral direct loan of Rs 25,00,00,000 at 14.0 per cent, negotiated between this one lender and this one borrower, with no other lender in the document. The 14.0 per cent, like every rate in this lending book, is the fund's own contracted rate and is not a statement about what borrowing costs anybody in India. Position 7 is the Rs 20,00,00,000 participation worked through above.

Now ask each of them the same question: the borrower needs a term changed. On position 6 there are two parties to the document. Somebody at the fund talks to somebody at the borrower, they agree or they do not, two signatures go on one amendment and the loan has new terms. On position 7 there are seven parties to the same conversation, being the borrower and six lenders, and the answer is not reached by talking. The mechanism the document already contains runs instead: the agent circulates the request, the request is sorted into its class, the lenders vote or consent, and the fund contributes 5.0 per cent of the say or one consent of six depending entirely on which list it landed on.

The two instruments are the same kind of thing, a loan the fund negotiated privately and holds directly, and what separates them is not the money or the rate but how many people have to agree before anything about them can move. Changing position 6 takes a conversation. Changing position 7 takes a process.

The comparison also breaks a tidy story picked up early and carried too far: the story that private means bilateral, that a privately negotiated loan is by nature a deal between two parties, and that anything with a vote in it must therefore be a public market instrument. Position 7 is the counterexample sitting inside this fund's own lending book. Position 7 was privately negotiated, it is not listed, it is not quoted, and it still has six holders, a voting mechanic and a formal amendment process written into the agreement. Positions 6 and 7 together are Rs 45,00,00,000, being 18.75 per cent of this fund's Rs 2,40,00,00,000 of lending, and they sit two lines apart in the same schedule with completely different governance.

Why does the same Rs 20,00,00,000 carry three different percentages?

Because a percentage is a division, and this one participation sits inside three different totals at once. All three of the following sentences are true of the same rupees on the same day. Rs 20,00,00,000 is 5.0 per cent of the Rs 4,00,00,00,000 facility. Rs 20,00,00,000 is 8.3 per cent of the Rs 2,40,00,00,000 this fund has lent across its eight positions. Rs 20,00,00,000 is 6.7 per cent of the Rs 3,00,00,00,000 the fund's investors have committed to it.

The three figures answer three different questions. The 5.0 per cent answers how much of this borrower's loan the fund funded and how much of the vote it carries. The 8.3 per cent answers how much of the fund's own lending is riding on this one borrower. The 6.7 per cent answers how much of what investors promised has gone into this one place. A sentence that quotes one of the three without naming its denominator has not stated a fact, it has stated a number, and the reader has no way to tell which of the three questions it was answering.

Naming the denominator is not a pedantic habit. Quoting a percentage without one is the arithmetic fault most often corrected across this whole subject. A reader who hears eight point three per cent and assumes it is a share of the facility will conclude the fund carries more of the vote than it does. A reader who hears five per cent and assumes it is a share of the lending book will conclude the fund is less exposed to this borrower than it is. Both readers did the division correctly. Neither was told what they were dividing by.

Can a lender sell its share and walk away?

Sometimes. Whether this particular lender can is not a rule of any market. A transferA lender selling its participation to somebody else. of a participation is governed by the transfer provisions of the facility agreement itself, and different agreements do very different things. Some allow a lender to sell freely to anybody. Some allow a sale only to a defined class of buyer. Some require the borrower's consent, some require the agent's, some require both, and some allow the borrower to refuse for a period and not afterwards.

The question a lender asks is never whether participations are transferable in general, it is what this document says, and a lender that has not read those clauses does not know whether it holds something it can leave or something it must sit with. This case fixes the size of the participation, the size of the facility and the number of lenders. The case does not fix the transfer terms of this facility. Where the buyer would be a bank or another regulated lender, the Reserve Bank of India at rbi.org.in is the authority for a regulated lender.

What goes wrong when a lender reads only its percentage?

What does a 5.0 per cent participant actually control?

Its own consent on all-lender matters. One consent is the complete list, and the list deserves to be stated plainly rather than dressed up. On everything the document sends to a majority, this fund holds Rs 20,00,00,000 against a threshold of more than Rs 2,00,00,00,000 and can be bound to an outcome it argued against. On everything the document sends to all lenders, the fund can refuse and the matter ends there. A refusal stops a change and never causes one, so the fund still cannot make anything happen.

A veto is a narrow instrument: it is the power to keep things as they are and nothing more, and confusing it with influence is how a small participant ends up disappointed in both directions. The fund cannot force a term to change on an all-lender matter, and it cannot prevent one from changing on a majority matter. The fund holds a single yes or no on one list of questions, exercised on its own, without needing anybody else.