Syndicated Loans And Bonds Essay Example | Topics and Well Written Essays - 1000 words

Syndicated Loans And Bonds - Essay Example To gain a clear perspective of what a syndicated loan facility, let us first understand the nature thereof. Syndication can be loosely translated in terms of pooling of resources and capital. Banks are syndicated when they come together to carry out a single or multiple business transactions to a single or multiple individuals. One of the most popular transactions which these syndicated banks undertake is the syndicated loan facility. A syndicated loan facility is the term, which refers to a long-term loan, issued by a number of banks collectively to a single client or borrower. A lead institution or bank will serve as the secretariat and manage the syndicate. Typically, not all banks that will respond to the call for syndication have the same financial capacity and standing, they may not be on equal footing at all. Thus, the need for a system that will allow the participating banks to limit their participation according to their capacity in order to mitigate any incidents that may potentially lead to overexposure1. In other words, participating banks maintain their own independent operati ons and the participating banks only maintain â€Å"an arm’s length relationship†2 with each other. By contrast, bonds are securities issued by companies to the public as evidence of indebtedness. Bonds are promises to pay the principal as well as interest to its holder at a certain specified time indicated in the instrument. Government and business corporations for a number of purposes, which are generally indicated on the face of the certificates, may issue it. Generally, issuance of bonds is another form of borrowing money. Thus, the relationship formed between the issuer of the bond and that of the holder thereof is that of a debtor and creditor. Bonds are highly saleable commodities3 as they are considered a safe form of investment and can be used as collateral to support loan4.