# Syndicated Loans Explained: Structure, Function, and Real-Life Examples

## What Is a Syndicated Loan?

A syndicated loan is a collaborative financial arrangement provided by a group of [lenders](https://www.investopedia.com/terms/l/lender.asp), known as a syndicate, to fund a single borrower, which might be a corporation, large project, or sovereign government. This structure emerges when the financial requirements surpass the capacity of a single lender or when expertise in a particular [asset class](https://www.investopedia.com/terms/a/assetclasses.asp) is necessary. By forming a [syndicate](https://www.investopedia.com/terms/s/syndicate.asp), lenders can diversify their risk and access financial ventures too significant for individual lenders. This collective financing can take the form of a fixed sum, a [credit line](https://www.investopedia.com/terms/l/lineofcredit.asp), or a hybrid of both, enabling large-scale projects to be realized with shared risk and expertise.

### Key Takeaways

*   A syndicated loan involves multiple lenders teaming up to provide funds to a single borrower, allowing for risk distribution among the lending group.
*   These loans are usually organized by a lead bank or underwriter, which may hold a larger portion of the loan and manage administrative tasks for the syndicate.
*   Syndicated loans are popular for large-scale financing needs, such as corporate takeovers, due to their ability to spread financial risk across several institutions.
*   There are different types of syndicated loans, including best efforts syndication, club deals, and underwritten deals, each with distinct setups and risk profiles.
*   An example of a syndicated loan is Tencent Holdings' $4.65 billion deal in 2017, coordinated by Citigroup with contributions from a dozen banks.

![Syndicated Loan](https://www.investopedia.com/thmb/SgQ8mNSSvT7Te4Bjal-FQi9eGU4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Syndicated_Loan_Final-05a554cb88bb439cab1ccc32751b437f.png)

*— Investopedia / Candra Huff*

## Understanding the Mechanics of Syndicated Loans

There is typically a [lead bank](https://www.investopedia.com/terms/l/lead-bank.asp) or [underwriter](https://www.investopedia.com/terms/u/underwriter.asp) with a syndicated loan. This institution is known as the arranger, the agent, or the lead lender. The lead bank may put up a proportionally bigger share of the loan, or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks.

The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders or banks, or [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp), such as pension funds and [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp). Syndicated loans are larger than standard loans, so one default could be devastating for a single lender. Syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding.

In [best-efforts](https://www.investopedia.com/terms/b/best-endeavors.asp) syndication, if not enough investors join, the borrower gets less money than planned. These loans can also be split into dual [tranches](https://www.investopedia.com/terms/t/tranches.asp) for banks that fund standard revolving credit lines and institutional investors that fund fixed-rate term loans.

Interest rates may be fixed or variable, often tied to [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp) like the [Secured Overnight Financing Rate (SOFR)](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954). SOFR is a dollar-denominated interest rate used by banks for derivatives and loans. This rate is based on transactions that take place in the Treasury repurchase market.

> **Important**
>
> Because they involve such large sums, syndicated loans are spread out among several financial institutions, which mitigates the risk in case the borrower defaults.

## Exploring Different Types of Syndicated Loans

### Best Efforts Syndication

In a best-efforts deal, the lead bank tries to form a syndicate but isn't required to fund the loan itself. This lead, however, isn't obligated to make any loans, including in its entirety, to the borrower itself. Rather, it acts as an agent to approach other lenders to come together to finance the loan. Best-efforts loans are common for borrowers with [bad credit](https://www.investopedia.com/terms/c/credit-history.asp) or in a weak economy.

### Club Deal

Club deals are loans under $150 million, involving a small group of lenders who know the borrower. Lenders in club deals typically share the loan, interest, and fees equally.

### Underwritten Deal

An underwritten deal is fully guaranteed by the lead bank. If no other bank joins, the lead bank must finance the whole loan. It may try to get investors later on down the road as an option to spread out the risk.

> **Fast Fact**
>
> Syndicated loans are also known as syndicated bank facilities.

## A Real-World Example of a Syndicated Loan

Syndicated loans are usually too large for a single lender to handle. For example, China's Tencent Holdings signed a syndicated loan deal on March 24, 2017, to raise $4.65 billion. The loan deal included commitments from a dozen banks with Citigroup acting as the coordinator, mandated lead arranger, and [book runner](https://www.investopedia.com/terms/b/bookrunner.asp), which is the lead underwriter in a new debt offering that handles the books.

Tencent previously increased the size of another syndicated loan to $4.4 billion on June 6, 2016. That loan, which was used to fund company acquisitions, was underwritten by five large institutions: Citigroup, Australia and New Zealand Banking Group, Bank of China, HSBC Holdings, and Mizuho Financial Group. The organizations created a syndicated loan that encompassed a five-year facility split between a [term loan](https://www.investopedia.com/terms/t/termloan.asp) and a [revolver](https://www.investopedia.com/terms/r/revolver.asp).

## Why Do Banks Syndicate Loans?

Syndicated loans let borrowers raise funds from various lenders. Lenders form a syndicate and provide different amounts based on their risk tolerance. Banks syndicate loans because it allows them to lessen the risk associated with lending to a borrower. That's because one bank (usually) doesn't take the full responsibility for 100% of the loan.

## How Risky Are Syndicated Loans?

Lending at any level can be risky. But, the risks associated with [lending in a syndicate](https://www.investopedia.com/terms/p/pro-rata_tranche.asp) can be a little lighter. That's because each bank in a group is only responsible for guaranteeing a small portion of the total loan amount. So if a company defaults on its syndicated loan, one bank won't be out the full amount of the loan. Rather, it will only lose out on the portion it agrees to finance. For example, if five banks each fund part of a $100 million loan, each would lose $20 million if the borrower defaults.

## What Is a Syndicated Mortgage?

A syndicated mortgage is a loan that is secured by a mortgage. This type of loan involves multiple lenders. It can be a simple loan with three parties or a complex deal with many lenders for large real estate projects. Syndicated mortgages commonly finance most of the initial phases of real estate development like planning and zoning.

## The Bottom Line

Syndicated loans allow multiple lenders to form a group and contribute a certain portion of a full loan. These types of loans allow lenders to spread the risk among others so they aren't liable for the full amount in the event of a default.

> **Article Sources**
>
> 1.  Truist. "[Exploring the Power of Syndicated Loans for Middle Market Businesses](https://www.truist.com/resources/commercial-corporate-institutional/financing/articles/exploring-the-power-of-syndicated-loans)."
>     
> 2.  BankLabs. "[Understanding Syndicated Loans.](https://banklabs.com/understanding-syndicated-loans/)"
>     
> 3.  Reuters. "[Chinese Tech Giant Tencent Signs $4.65 Billion Loan Deal](https://www.reuters.com/article/idUSKBN16Z0D5/)."
>     
> 4.  Bloomberg. "[Tencent Said to Increase Size of Syndicated Loan to $4.4 Billion](https://www.bloomberg.com/news/articles/2016-06-06/tencent-said-to-increase-size-of-syndicated-loan-to-4-4-billion?embedded-checkout=true)."
>     
> 5.  Thomson Reuters Practical Law. "[Syndicated Mortgages](https://ca.practicallaw.thomsonreuters.com/0-575-5357?transitionType=Default&contextData=%28sc.Default%29&firstPage=true)."