Loan Syndication as an Alternative to Business Finance in Nigeria

Loan Syndication as an Alternative to Business Finance in Nigeria

 Loan Syndication- Some corporations and business organization are opposed to syndicated loan financing because of the ignorance of its meaning.  Possible genesis and advantages.  It is also true that some others give their support to its use because of their knowledge of what loan syndicate involves. However, it is hoped that at the end this chapter the accurate meaning will be understood clearer.

According to Oxford Advanced Learner’s Dictionary (Special Price Edition) Syndication is a group of people or business companies combined to pursue a common interest.  It can also be been as an association of individuals or corporations formed to carryout some financial project requiring much capital or any group organized to further some under takings.

Obanda also defined loan syndication as “the art and process whereby a group of financial institution is raised to provide credit facilities to a borrower under common agreement terms and single loan documentation”.

According to Onwughara, the first Syndicated loan could be traced to the bankers of the middle ages who often distributed financing risk among several houses to support trade flow.  After the war, the United States Government introduced attractive tax incentives, which encourages corporations to undertake large capital investment programmes designed to match the growth rate of the economy.

Prior to 1960 history had no record of syndicated loan as a source of business financing in Nigeria.  In Nigeria, the first syndicated loan could be traced to the 1960’s when a consortium of commercial banks and acceptable hours discounted trade for marketing boards under the produce bill finance scheme.  Formalized loan syndication came into being during the oil boom of 1970’s when there was need for adequate capital to finance the industrialization programmes and government.  During this period, few merchant banks had been incorporated.

Loan syndication has assumed greater dimension since the coming of the merchant banks in the 1980’s.  This was as a result of the Federal Government’s declared policy towards industrial expansion.  As this policy was being implemented, there was an increased need for the specialized factor made service of merchant banks, particularly loan syndication and re-organization to under-write new issue through syndicate to accelerate the pale of industrialization.

FORMS OF SYNDICATED CREDIT FINANCING:

Apart from the formal loan syndication by financial, institutions, there are other forms of syndicated credit, but the most important point to note is that the process of syndicating one facility does not differ remarkably from that of another; these forms are:-

i)       SYNDICATED LEASE – FINANCING:

This is an arrangement with a number of leasers (Merchant Banks) usually because the cost of the assets or potential risk is too high to be borne by one leasor.  In this type of lease, may leasors come together to find a single asset with each of such leasor’s credited with its investment in the acceptance certificate evidencing investment in the relative asset.

Some big equipment that involve huge amount like Aero plane, oil drilling and heavy industrial machines cannot be financed by one leasor.

The first syndicated lease contract in Nigeria was by continental Merchant Bank Limited in 1937 for spinter limited of asset worth N20m.

Others were led by International Merchant Bank and Merchant Bank of Africa provided N20m lease for Enpee, Industries and N25m lease for star industries respectively in 1987.

ii)      UNDERWRITING SYNDICATE:

In Nigeria underwriting can be defined as an arrangement whereby an underwriter (issuing house) undertakes to pay an issuer of security (Issuing Company) at a Pre-determined date, an amount based on the price of the shares with view to based on the price of the shares with a view resale and not a form of investment.

If the sum of money involved are large and the risks of price fluctuation are substantial, the issuing house (investment bank) forms a syndicate in an effort to spread a minimize the amount of risks they carry.

The managing/lead underwriter invites other investment bankers to participate in the transaction on offering to be made and on the basis their strength and contracts in selling securities.

Loan syndication is also characterized with the following:-

a.       Repayment provision

b.       Additional long term debt

c.       Management

d.       Financial statements

1. Collateral or security

PROCEDURES FOR SYNDICATING A LOAN:

The entire process of syndicating a loan may be classified into three (3) main phases namely:-

1.       The contact/mandate stage

2.       The contractual/Documentation stage

3.       The credit administration stage.

When a business organization concerns an idea to finance a particular project with a syndicated loan, the borrower will usually channel its request to a bank with which it has already established   relationship or alternatively to a bank It has carefully chosen based on the perception or assessment of its expertise and ability  to package the facility. It may also channel the request to a number of banks calling for bids or offer with a view to selecting the most favourable offer the bank of the borrower’s choice which agree to raise the required amount either on best effort bases or an underwritten obligation is known as the lead bank or lead manager of the syndication.  The other banks in the syndication are called participating banks.

Sometimes, the participating banks may appoint one of them to represent their interest in certain regards of the syndicated loan.

A bank so appointed is called an agent bank. It is pertinent to note here that in Nigeria, the lead bank and agents functions are combined thus the agent bank is more often not same as the lead Bank.

METHODS OF SYNDICATING LOAN

[1] The participating syndication method;-

This is the most popular syndication method on the country today, Here, the bank originating the syndication called the lead bank, structures the package for the borrower without committing for itself the whole amount of the loan. It rather form a syndicate of lenders to provide the facility on a best effort basis. This method is popular in Nigeria because most loan proposals are always of large sums and banks in order not to disobey the statutory laws and requirements do not normally commit themselves to loan applications until the amount has been taken up or sure that it will be taken up by other participating banks.

2                   The club syndication method;- Here, a borrower that considers itself to be of great credit standing in the financial circles, structures the loan by inviting banks on its own to participate in the facility. It will simply appoint an agent to co-ordinate the participating to the borrower since most of the cost and fees that will be paid to a lead bank will not be paid despite the existence of some blue chip companies in the country that are very credit worthy that can make use of this method, the most method is still not popular in the country. The answer received for the unpopularity is that banks in Nigeria regard this method as an informal way of syndicating a loan in terms of appraisals and perfection of securities.

3                   The straight method;- Here, the originating banks structures the loan package and commits simply the total loan amount to the borrower .It will subsequently offer participation in the loan package to other banks. This method also is not very popular in Nigeria namely because of banks unwillingness to only beer the risk of a large loan proposal and also because of the statutory requirements stated earlier.

ADVANTAGES OF SYNDICATED LOAN AS FINANCING ALTERNATIVE

The following are the advantages of the syndicated loan;-

1] The main advantage of syndicated loan is flexibility. The borrower need through with the lender and can be factored to the borrower’s need through direct negotiation.

2 It lowers the cost of capital to the firm, because of tax deductibility of interest payments.

3                   It serves the borrower the pains of raising equivalent loan independently from different Financial  Institutions.

4                   The repayment schedule is usually geared to the borrowers cash flow ability to service the debt since syndicated loan is usually amortized .

5                   Maintenance of  ownership states, The cost of capital to the firm is reduced because of the reduction of tax interest

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

“LOAN SYNDICATION AS AN ALTERNATIVE BUSINESS FINANCING STRATEGY IN NIGERIA.

(A CASE STUDY OF UNION BANK OF NIGERIA PLC. NEW MARKET ROAD ONITSHA).”

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 Loan Syndication as an Alternative to Business Finance in Nigeria

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