EECS 1541 Lecture Notes - Lecture 10: Credit Risk, Syndicated Loan
22 Jun 2018
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EECS 1541 Lecture 10 Notes
Introduction
Syndicated Loans in the Credit Market
International credit market activity has increased over time, yet the growth is mostly
concentrated in regions where economic conditions are relatively strong.
Those regions tend to have more funds deposited by MNCs as well as a strong demand
for loans by MNCs that are expanding their business.
Conversely, lending tends to decline in regions where economic conditions are weak
because MNCs are less willing to expand and thus do not borrow additional funds.
Banks then are also less willing to grant loans because credit risk is higher in regions
where economic conditions are weak.
Sometimes a single bank is unwilling or unable to lend the amount needed by a
particular corporation or government agency.
In this case, a syndicate of banks may be organized.
Each bank within the syndicate participates in the lending.
A lead bank is responsible for negotiating terms with the borrower, after which this
bank organizes a group of banks to underwrite the loans.
Borrowers that receive a syndicated loan incur various fees besides the interest on the
loan.
Front-end management fees are paid to cover the costs of organizing the syndicate and
underwriting the loan.
In addition, a commitment fee of about .25 or .50 percent is charged annually on the
unused portion of the available credit extended by the syndicate.
Syndicated loans can be denominated in a variety of currencies.
The interest rate depends on the currency denominating the loan, the loan’s maturity,
and the borrower’s creditworthiness of the borrower.
Interest rates on syndicated loans are usually adjusted to reflect movements in an
interbank lending rate, and the adjustment may occur every six months or every year.
Document Summary
International credit market activity has increased over time, yet the growth is mostly concentrated in regions where economic conditions are relatively strong. Those regions tend to have more funds deposited by mncs as well as a strong demand for loans by mncs that are expanding their business. Conversely, lending tends to decline in regions where economic conditions are weak because mncs are less willing to expand and thus do not borrow additional funds. Interest rates on syndicated loans are usually adjusted to reflect movements in an interbank lending rate, and the adjustment may occur every six months or every year. Lending tends to decline in regions where economic conditions are weak because mncs are less willing to expand and thus do not borrow additional funds. Banks then are also less willing to grant loans because credit risk is higher in regions where economic conditions are weak.
