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Question 1
1. The basic legal fact of this case.
A bond is a debt security, which is also a formal contract to repay borrowed money with interest at fixed intervals.[1] Bond is like a loan, which provides Flamingo International (Flamingo) with external funds to finance long-term investments. While compared with bond issue, the syndicated loan is much more popular. Paine Webber Equity Research (1999) published a report "The biggest secret of Wall Street", which calls syndicated lending "the biggest, highest fee generating, and most profitable corporate financing business on Wall Street."[2] Syndicated loan generates approximately $5.5-6.0 billion of fees annually, while bonds only generate fees of $3.2 billion.[3]
In this case, Flamingo is the authorized issuer, who owes the holders a debt and, is obliged to pay interest of 6 per cent for a 10 years term and repay the principal of 250 million US dollars in approximate three months. The interest of the bond is 15 million US dollars. Flamingo also borrowed the sum of 200 million Euros by way of a syndicated loan four years ago. This loan is for a term of 10 years, is in Euros and has an interest rate of 8% payable annually. According to the current exchange rate, 200 million Euros is about 247 million US dollars, and its annual interest is about 19.76 million US dollars. Thus in this year, Flamingo should prepare cash of 284.76 million US dollars ($250 million +$15 million +$19.76). Its a huge amount, and the Flamingo is preparing for a new project which will require capital expenditure of at least US$300 million. The cash reserves of Flamingo is only US$200 million, far less than the needs of Flamingo. Therefore, the best alternative of Flamingo is to conduct a new syndicated loan.
2. What's the syndicated loan?
Syndicated Loan refers to the loan mode that under the management of one or several banks. These banks which have obtained the permission to run loan business combine as a banking group. The banking group adopts the same loan agreement, and provides the financing tohttp://www.ukassignment.org/daixieAssignment/daixieyingguoassignment/ the same borrower according to the agreed period and conditions. Syndicated loan mainly includes the following essential factors: 1) two or more banks are involved. 2) All involved banks issue loans on similar terms and according to the common documentation. 3) The correspondent bank is to responsible for all loan services.
Syndicated loan can be divided into domestic syndicated loan and international syndicated loan depending on whether the participating banks are from home or abroad. Domestic syndicated loan is the loan mode that a domestic bank or financing institution offer loans to a domestic borrower. International syndicated loan is a loan mode that involves international factors. It refers to the loan mode that the loan banks and the borrower are from different countries. International syndicated loan is a part of international financial law, and occupies an important position in international economic law. It has been an important business loan mode in international capital market.#p#分页标题#e#
International syndicated loan is a major mode of international business loan at present. Compared with the legal characteristics (flexible deadline, simple legal relations and borrowing procedures) of bilateral loans, international syndicated loan has the following characteristics:
Relatively large amounts of loans
More people participating in the financing
3. The reason for this case to choose a new syndicated loan.
In this case, the reasons to adopt syndicated loan for repayment of the bonds and financing new project are as follows.
3.1 The borrower can not only raise large sum of capital, but also can save financing cost and develop multiple bank-enterprise relationship. Firstly, the international syndicated loan can raise huge sum of capital for the borrowers, because one single bank usually can not afford the enormous amount of money and meanwhile the financial authorities in many countries set an upper limit for loan that the commercial bank lends to the same borrower. The Section 81 of Hong Kong Banking Ordinance (lending limits of authorized institutions) provides the same loan limits, that is, the loan shall not exceed an amount equivalent to 25% of the capital base of the institution. A large long-term bank loan is often difficult to bear by one single bank. Hence, the international syndicated loan can provide the huge amount of money that can not be afforded by one single bank.#p#分页标题#e# Secondly, according to statistics, compared with other sources of raising large amount money such as international bond market or bill market, the financing cost of the loan raised through international syndicated loan is relatively lower and the borrowers are more receptive to raise huge sum of money through syndicated loan. Finally, through international syndicated loan, in the same contract or agreement, the borrowers can save the time of negotiating with the help of the management of the agency bank and establish partnership with a number of banks, which will bring the borrowers with new opportunities for the business development and the use of different banks’ various combination of products
3.2 The international syndicated loan can spread the risk of loan and increase the credit capability of the bank. The security of the funds is the prior consideration of the bank when providing loans. Banks gain profits from the loan when the safety of the funds is guaranteed. Even if a large bank is capable of providing a huge amount of money, it will not rashly loan out the money because it is rather risky. Through the international syndicated loan, each bank participated in the loan shares a part of the total fund and the risk is also shared by them so that even if the borrower could not pay back later, the lost for each bank would be relatively smaller. From the perspective of individual bank, the international syndicated loan can expand the lending scale, make the released money distributed among more borrowers and thus spread the risks of the asset, which is also the purpose of diversifying investment (Diversification) for the bank.
3.3 For the lead bank and participating bank, the international syndicated loan has other benefits as well. Because the syndicated loan normally provides finance for large projects that have large scale of input and require sophisticated management. Accordingly, the shareholder company or the management company is either internationally renowned corporation or partner of the large state-owned or government-related companies of the host country. Through participating in project financing, the international syndicated loan is able to expand and enhance the visibility of the participating banks. Then, the cooperation of the participating banks in the international syndicated loan can avoid competition in the same industry and enhance the inter-bank relationship.
3.4 The international syndicated loan allows the bank to have higher asset liquidity. The amount of capital used for loans is limited for commercial banks in a certain period of time. Compared with bilateral loans, the international syndicated loans diversify the credit assets for the bank, leading to not only the diversification of customers, but also the term and type of the loan, which to a certain extent increases the liquidity of the credit assets of the lending banks. #p#分页标题#e# 3.5 The international syndicated loan can help improve the income structure of the commercial bank. From the perspective of income character, there are two kinds for the commercial banks: one is the loan interest income related to the credit operations, also the main income from the traditional business of the commercial banks; the other is the service fee income, which is called the intermediary service income in China. The loan interest income is always associated with the loan risk. Therefore, reducing the loan interest income and increasing the share of intermediary service income in the total revenue is one of the business objectives for the modern commercial banks. The various fees involved in the syndicated loans, such as the leading fee, arrangement fee and the management fee, can bring intermediary income for the participating banks in the syndicated loan, which will improve the traditional charging structure for the banks. This is also why the syndicated loan is popular among banks.
3.6 The borrowers can avoid the restrictions for taxes and loans in their countries. Many countries provide that the borrower, when paying loan interest to the domestic banks, and the domestic banks, when paying loan interest to foreign banks, are not subject to withholding tax. If the domestic bank leads the participation of foreign banks in providing loans, the borrower can avoid the withholding tax. In addition, some countries provide that the general domestic borrowers can not borrow directly from the foreign banks and only the banks authorized by government or ratified by relevant department can raise foreign loans. Through the international syndicated loans led by the authorized domestic banks to arrange the participation of foreign banks, the borrowers can borrow money actually from abroad through the domestic banks.
3.7 Syndicated loans can reduce the debt burden for the banks through refinancing. The banks usually refinance the financing that will expire in one or two years through the market, which is common in Korea and especially popular in Hong Kong. From the perspective of company, almost 90% of the transaction is refinancing.
4. How to conduct an international Syndicated loan transaction?
4.1 To decide the best alternatives of modes of international syndicated loan. There are two ways for banks and other financial institutions to participate international syndicated loan: one is the direct way. That is to say, the participating banks directly and respectively sign a loan agreement and provide loans according to the agreed conditions under the leadership of agent banks. And this is the most common way at present. Seeing from the moment the lead manager and the agent bank reaching an agreement, the other way is a kind of bilateral loan, in which there is only one participating bank. However, later on, as terms of transaction have been clearly defined in the loan agreement, the real financing amount of the borrower comes from different banks after the transaction. This kind of loan can be called indirect international syndicated loan.#p#分页标题#e# Indirect international syndicated loan is actually based on direct international syndicated loan. The main difference between them is whether the loan bank has the right to transfer its own loan responsibility and benefits to other banks who are not participators in the name of participating right of international syndicated loan. In other words, direct international syndicated loan is a static mode. Once the syndications are formed, they will take the responsibility of offering loans and enjoy rights of getting benefits without changes. While indirect international syndicated loan is a dynamic mode. In this mode, participating rights can be transferred to other banks who are not participators, making the members of the syndicated loan in a dynamic situation. Therefore, the relationship between the agent bank and other members and the duty of the agent bank in direct international syndicated loan can also be applied to indirect international syndicated loan. In international syndicated loan, especially international business syndicated loan, direct international syndicated loan is more common.
2. [1] O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p197. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4 [2] Horowitz, Keith, Ruchi Madan, and Robert Sobhani. (1999). The Biggest Secret of Wall Street. Paine Webber Equity Research. [3] Ibid. |
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