This chapter contains the following sections:
The Loan Syndication modules of Oracle FLEXCUBE address loan operations of a bank or a financial institution that enters into loan syndication contracts with borrowing customers (borrowers).
The loan syndication modules are the Syndication Facility (FC), Syndication Borrower (LB) and Syndication Participant (LP) modules.
A syndication agreement is reached between a borrower and a bank (or a financial institution), which arranges the syndication. The arranger bank identifies one or more banks or financial institutions that pool funds to meet the borrowing requirements. These banks or institutions are known as participants.
The arranger bank actually disburses the loan, after receiving the contributions of the other participants. The participants in the syndication share the interest and other income accruing from the loan, in the ratio of their participation that was agreed upon at the time of drawing up the loan syndication agreement.
The process in which the loan is disbursed (or the customer avails the loan) under a syndication agreement depends upon many factors. The most important factor is the nature of the requirement of the customer. The other factor is the identification of the participants who would share the load of funding the borrowing.
The customer could choose to avail the loan:
Each installment of the syndicated loan that is made available to the borrower is funded by a set of participants. Each such installment is known as a tranche. Therefore, under a tranche, a specified portion (or the entire amount, depending upon the arrangement) of the total loan is made available to the borrower.
The tranche takes the form of a commitment on the part of each of the participants to grant, in principle, the provision of funds for the amount being made available under the tranche. It also involves a commitment on the part of the customer to avail the funds made available under the tranche.
When the terms of a tranche are finalized, the schedules for the actual loans to be made available to the customer under the tranche are also finalized, according to the requirement of the borrower. The participants are directed to fulfil their commitments whenever a schedule is due.
When the commitments are fulfilled, the borrower may avail the funds made available under a tranche as drawdown loans. Depending upon the requirement, the borrower may avail of the tranche amount in a specified number of drawdown loans. These loans may have a term or tenor that is independent of the tranche tenor.
The tenor of the drawdown loans falls within the period between the start date and the end date of the main syndication contract. In addition, the tenor of the drawdown loans begins within the tenor of the tranche.
Therefore, the main borrowing requirement (or total principal) in a syndication contract may be disbursed to the borrower through one or many tranches (installments), and each tranche may be split down into a specified number of drawdown loans. A tranche amount could also be disbursed through a single drawdown loan, if so required by the borrower.
This chapter explains each of the features of the Loan Syndication module of Oracle FLEXCUBE, enabling you to understand how you can use the system to process syndicated loans.
The following example illustrates the concept of loan syndication:
Example
The syndication contract
Your bank offers the facility of entering into syndication contracts with customers who request loans. You have identified other banks or financial institutions for the purpose of pooling in resources to meet the borrowing requirements of the loan syndication contract.
One of your customers, Mr. Chad Jacobs, has approached you for a loan of 200,000 USD on 1st June 2000. You enter into a syndication contract with him on the same date, with a view to meeting his funding requirement by identifying other banks or institutions that can share the load of funding. The agreement is entered into on 1st June 2000, and the end date, by which all components of the borrowed amount will be repaid, is 1st June 2001.
Mr. Chad Jacobs’ borrowing requirement is as follows:
Portion of loan desired in the next tranche: 100,000 USD Mr. Jacob desires to completely avail of this first tranche amount in the following pattern:
In addition, the details of interest applicable on each tranche is as follows:
Tranches
Mr. Chad Jacobs’ syndicated loan is therefore required to be disbursed in two different sets of tranches, as seen above.
The syndication contract also involves a ‘commitment’ from Mr. Chad Jacobs as the borrowing customer, as well as from willing participants who undertake to meet the borrowing requirement, and to disburse the loan after pooling together resources.
For the first installment, wherein an installment principal of 100000 USD is to be lent at 5% fixed rate of interest, your bank has now identified Fargo Eastern Bank and Gold Crest Commercial Bank as potential sources from whom funding may be obtained, to meet Mr. Chad’s borrowing requirement. The funding load is proposed to be shared in the following pattern, which is known as the ratio of participation:
The ratio of participation could also be expressed through percentages. Each of the participants enters into a commitment contract, pledging to provide the portion of funds agreed upon by them.
Since the first installment set is required to be made available according to the schedule falling between 1st June and 31st August, the participants are reminded to fulfill their commitments just before each schedule is due. This would mean that the approved contributions from each participant would be credited into a common syndication pool before each schedule is due. The schedule dates, according to the agreement, are 30th June, 31st July and 31st August.
This arrangement, wherein the participants commit to provide the funding as per their pledge, and then proceed to fulfill their commitment, is known as a tranche. It is under the auspices of a tranche that the principal of the syndicated loan amount is actually made available to the customer.
The tenor of each of the commitment contracts with the participants would be, in the case of the first tranche as given above, three months.
Let us suppose that the value date of the tranche contracts with each participant is 1st June 2000. The approved contributions would then need to be credited into a common syndication pool, in the mutually agreed ratio, before each schedule date, i.e., before 30th June 2000, before 31st July and before 31st August.
The above arrangement (for the first tranche) meets the borrowing requirement of the first installment. To meet the remaining portion of the requirement wherein an installment principal of 100000 USD is lent at floating interest rates, your bank has identified North American Overseas Bank and Banco Italia as funding partners. The ratio of participation is finalized as follows:
Again, each of the participants enters into a commitment contract, committing to provide their portion of funds as agreed. This arrangement forms the second tranche under the syndication contract.
Since the second installment set is required to be made available according to the schedule falling between 1st September and 30th November, the participants are reminded to fulfill their commitments just before each schedule is due. This would mean that the approved contributions from each participant would be credited into a common syndication pool before each schedule is due. The schedule dates, according to the agreement, are 30th September, 31st October and 30th November.
The tenor of each of the commitment contracts with the participants would be, in the case of the second tranche as given above, three months.
Mr. Chad Jacobs’ requirement of 200000 USD under the syndication contract has now been mobilized under two separate tranches, with the main players as follows:
Tranche One (1st June to 31st August) |
Tranche Two (1st September to 30th November) |
Mr. Chad Jacobs (Borrowing customer) |
Mr. Chad Jacobs (Borrowing customer) |
Your bank (Participant) 35000 USD |
Your bank (Participant) 25000 USD |
Fargo Eastern Bank (Participant) 35000 USD |
North American Overseas Bank (Participant) 40000 USD |
Gold Crest Commercial Bank (Participant) 30000 USD |
Banco Italia (Participant) 35000 USD |
Therefore, the borrowing requirement in a syndication contract can be realized in as many tranches as required. Each tranche have the borrowing customer, and may have either common or different participants. In addition, each of the players in a tranche is under a commitment contract to fulfill their portion of the ratio of participation.
Draw Downs
To recall, the schedule defined for the actual loans to be made available to Mr. Chad Jacobs’ according to his borrowing requirement under the contract is as follows:
Tranche One:
Tranche Two
This means that either on 30th June or any date following it, up to 31st July, Mr. Jacobs can avail his first loan under the syndication contract, to the tune of 30000 USD, which is made available to him under tranche one.
Similarly, either on 31st July or any date following it, up to 31st August, Mr. Jacobs can avail his second loan under the syndication contract, to the tune of 35000 USD, which is made available to him under tranche one.
Therefore, Mr. Jacobs is given the opportunity, according to the schedule, to avail of the portion of the total loan amount made available under each tranche, in a specified number of loans. Each of these loans is called a drawdown loan.
Therefore, according to the schedule, the drawdown loans availed by Mr. Jacobs under the syndication contract, and under each tranche, could be as follows:
Value Date of the Syndication Contract: 1st June 2000
Loan number |
Loan Contract Date |
Amount (USD) |
Tranche |
Participant break-up |
1 |
30th June 2000 |
30000 |
1 |
As agreed for tranche one |
2 |
31st July 2000 |
35000 |
1 |
As agreed for tranche one |
3 |
31st August |
35000 |
1 |
As agreed for tranche one |
4 |
30th September |
30000 |
2 |
As agreed for tranche two |
5 |
31st October |
35000 |
2 |
As agreed for tranche two |
6 |
30th November |
35000 |
2 |
As agreed for tranche two |
Each of the drawdown loans can have independent life cycles and different tenors. However, all six drawdown loans must mature before the end date of the syndication contract, which is 31st June 2001.
Each of the participants in a tranche will share the interest income derived from any loans availed by Mr. Chad Jacobs under the syndication contract.
In this manner, your bank has fulfilled Mr. Chad Jacobs’ borrowing requirement under the syndication contract dated 1st June 2000.
A borrower requests for a participant to get certain amount of drawdown payment. In some cases, there could be delay of 1-2 days in between the borrower request for a drawdown and the actual disbursement from the participants. The reason for delay could be on account of documentation, legal formalities, and so on.
In case the borrower urgently requires the funds, the borrower can avail the funds immediately using a Swing Line. The swing line has the following features:
In Oracle FLEXCUBE, any service or scheme that you want to make available to your customers can be defined as a product. For instance, your bank may be entering into lending agreements with other lending banks, to disburse loan requests as a syndicate. This facility of disbursing syndicated loans can be defined as a product.
Going further, your bank could be offering borrowing customers loans through any tranche of a syndication contract framework. To recall, a tranche is a channel through which a borrowing customer could receive the required loan as a drawdown. This facility that you want to offer to your customers, of availing loans through a ‘tranche’ arm of the syndicate agreement, could also be defined as a tranche product.
Defining products simplifies the task of disbursing syndicated loans. Typically, you would need to specify the following information about a tranche product each time you process a drawdown under the tranche:
You can define a product with all the specifications listed above. Each time you enter a drawdown under the product into Oracle FLEXCUBE, they are automatically applied to it, and you need not specify them new.
In Oracle FLEXCUBE, you can define two levels of products for syndication contracts:
Oracle FLEXCUBE processes syndication contracts by allowing you to capture contracts at both the tranche level as well as the drawdown level under a tranche.
When you open a tranche under a syndication contract, you input a commitment contract for the borrowing customer. Based on this, the system creates a commitment contract for each of the participants.
The borrower tranche contract involves the borrower tranche product that you have defined. The participant commitment contracts involve the participant commitment products you have defined.
Though the tranche contracts may involve different products, all the contracts involved in a particular tranche are processed simultaneously.
The tranche contracts may be revolving or non-revolving, according to the requirement of the borrower. In a revolving commitment, the commitment amount is reinstated when it is fulfilled. Therefore, the commitment amount pledged to a borrower is reinstated once the drawdown loan availed has been repaid by the borrower. If the commitment is non-revolving, the commitment amount is not reinstated on repayment of the drawdown loan availed.
After a tranche comes into effect (that is, on and after the value date of the borrower tranche contract), the drawdown loan contract for the borrower can be entered into the system.
When you input a drawdown for the borrowing customer under a tranche, the system creates a contract for each of the participants involved.
The borrower drawdown loan contract involves the borrower drawdown loan product that you have defined. The participant contracts involve the participant products you have defined.
Repayments as well as interest payments on a borrower drawdown loan are distributed to the participants.
A common loan syndication pool is maintained to which contributions towards the borrower loan principal would be credited, and from which the borrower avails drawdown loans. Repayments of principal are also credited into this common syndication pool, from where they are distributed to the participant nostro accounts.
A common loan syndication interest pool is maintained to which repayments of interest due on the loans are credited. From this pool, the interest due to each participant is distributed to the participant nostro accounts.
You can maintain a GL in Oracle FLEXCUBE that would serve the purpose of a common syndication pool, as well as another to serve the purpose of a loan syndication interest pool. These GL’s are known as Bridge GL’s.
The participants share income from the liquidation of charges or fees that are applicable to borrower contracts, according to the ratio of participation agreed upon when the syndication contract is drawn up.
You can liquidate these charges or fees online in Oracle FLEXCUBE and apportion the liquidated fee income to the participants, net of tax.