1.1.3 DrawDowns

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 topic explains each of the features of the Loan Syndication module of Oracle Banking Corporate Lending, 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 1^st 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 1^st June 2000, and the end date, by which all components of the borrowed amount is repaid, is 1^st June 2001.

Mr. Chad Jacobs’ borrowing requirement is as follows:

• Total syndicated loan principal: 200000 USD, in two tranches with a total tenor of six months.
• Portion of loan desired in the first tranche: 100,000 USD. Mr. Jacob desires to completely avail of this first tranche amount in the following pattern:
  • 30,000 USD on 30th June
  • 35,000 USD on 31st July
  • 35,000 USD on 31st August

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:

• 30,000 USD on 30th September
• 35,000 USD on 31st October
• 35000 USD on 30th November

In addition, the details of interest applicable on each tranche is as follows:

• For the first tranche, Mr. Jacobs desires interest to be applied as a fixed rate of 5%, and collected as bearing.
• For the second tranche, he desires interest to be applied as a floating rate.

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:

• Your bank (Participant) : 30000 USD
• Fargo Eastern Bank (Participant) : 35000 USD
• Gold Crest Commercial Bank (Participant) : 35000 USD

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 1^st June and 31^st 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 30^th June, 31^st July and 31^st 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 1^st 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, that is, before 30^th June 2000, before 31^st July and before 31^st 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:

• Your bank 25000 USD
• North American Overseas Bank 40000 USD
• Banco Italia 35000 USD

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 1^st September and 30^th 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 30^th September, 31^st October and 30^th 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:
  • 30000 USD on 30^th June
  • 35000 USD on 31^st July
  • 35000 USD on 31^st August
• Tranche Two:
  • 30000 USD on 30^th September
  • 35000 USD on 31^st October
  • 35000 USD on 30^th November

This means that either on 30^th June or any date following it, up to 31^st 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 31^st July or any date following it, up to 31^st 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: 1^st 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 31^st 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 1^st June 2000.