Previous Year Question
Consider the following statements:
Statement I: Syndicated lending spreads the risk of borrower default across multiple lenders.
Statement II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.
Which one of the following is correct in respect of the above statements?
Both Statement I and Statement II are correct and Statement II explains Statement I.
Both Statement I and Statement II are correct, but Statement II does not explain Statement I.
Statement I is correct, but Statement II is incorrect.
Statement I is incorrect, but Statement II is correct.
Correct Answer: C
Detailed Solution
A syndicated loan is provided to a single borrower jointly by a group of banks or financial institutions. This arrangement is generally used when the required loan is sufficiently large that a single bank may not wish to assume the entire credit exposure.
Each lender provides an agreed portion of the total loan. If the borrower defaults, the resulting credit risk is distributed among the participating lenders instead of being concentrated on a single bank.
One institution ordinarily acts as the lead arranger or agent. It plays a major role in structuring the loan, preparing documentation, coordinating the lenders and administering payments. Each lender’s claim is generally determined by its share in the facility.
Statement II is incorrect.
A syndicated loan is not confined to a fixed-amount term loan or a lump-sum loan. It may be structured as:
A fixed-amount term loan
A revolving credit facility
A line of credit
A combination of a term loan and a credit facility
The first part of Statement II—that a syndicated loan can involve a fixed or lump-sum amount—is correct. However, the claim that it cannot be a credit line is incorrect.
Syndicated lending and consortium lending are similar in that both involve multiple lenders. Their documentation, structure and administrative arrangements may differ, but both can distribute a large credit exposure among several institutions.