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Syndicate and Syndicate Loans
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)


In general, any joint venture; a temporary association of parties for the financing and execution of some specific business project.  The UNDERWRITING syndicate is a group of investment banking houses, or broker-dealer firms, that organize to underwrite an issue from a corporation or governmentality, as distinguished from a single underwriter.  The public offering and sale of relatively small aggregate issues might be accomplished by a single investment banking firm, the "originator"; but when the size of the issue is large, involving substantial risk and tie-up of the single originating firm's available capital and credit and requiring more selling power than the single firm can provide, the originating firm invites other investment banking firms to join it in functional syndicates.  Following are the types of syndicate agreements.

1.         Purchase agreement, the contract between the issuer and the purchase group of firms, a material provision of which is the agreement by the issuer to sell to each of the members of the purchase group and the agreement by the latter to buy their specified proportions of the total underwriting.

2.         Purchase group agreement (agreement among the underwriters), which not only repeats the participation liability of each member firm found in the purchase agreement but also authorizes the syndicate manager, acting for the purchase group, to place the "give-up" portion through selected other firms in the selling group at a concession and to institutional investors directly at the public offering price.

3.         Selling group agreement ("offering to selected dealers") between the syndicate manager, acting for the purchase group, and the invited dealers, mobilized thereby for greater distributive power for expeditious sale of the entire issue.  Members of the purchase group, to the extent of their "take-down", also distribute at retail to such extent.

Purchase Agreement.  

The passage of the Securities Act of 1933, with its registration procedure for public offerings and a waiting period until the effective date for public sale of 20 days or more, introduced a greater degree of risk in underwritings of the firm commitment type (including the standby type).  Thus, the purchase agreement now conventionally includes a "market out" or escape clause.  This provides that the purchase contract may be terminated by the representative firm (originator acting on behalf of itself and other purchase group members aggregating 50% or more participation):  "(a) if, prior to the time the post-effective amendment [to the registration statement] shall become effective, the market value of securities in general, or political, economic or financial conditions shall have so materially changed as in the judgment of the representative to render it inadvisable to proceed with such public offering; or (b) if, prior to the closing date [settlement with issuer for agreed proceeds of sale], the company shall have sustained a material and substantial loss by fire, flood, accident or other calamity which in the judgment of the representative shall render it inadvisable to proceed with the delivery of the securities, whether or not such loss shall have been insured."  Although this might seem to impair the binding nature of liability, in practice it is rarely invoked even when market conditions become unstable, because of the natural desire of the purchase group to have a satisfied issuer client.  The purchase agreement is also contingent upon the registration statement's reaching the effective date so that the securities may validly be publicly sold.

Purchase Group Agreement.  

This is the joint venture proper of the underwriting firms involved, covering such points at the liability of each participant ("several" liability conventionally in use limits liability of each participant to its agreed share of the total issue) and the appointment of the syndicate manager (usually from the originating firm) and granting of authority and discretion thereto in management of the syndicate on such matters as amount of give-up, formation of selling group and concession thereto from public offering price, necessary stabilization operations, termination or extension of the offering date, details of payment and delivery, manager's fee, and legal clauses such as indemnification, representations, and warranties.

Selling Group Agreement.  

A huge public offering might involve a relatively few members of the purchase group and hundreds of members of the selling group located throughout the country and abroad.  The syndicate manager, pursuant to the purchase group agreement, selects the selling group members and their allocations at the dealers' concession specified.  Since no public offering of the issue may be made before the effective date, the selling group agreement and the final prospectus are sent to the dealers on the effective date, for acceptance of the allocation, which is subject to prior sale.  It is often provided that the concession to the dealer will be withheld, or the shares returned to the dealer, with respect to any shares that the manager has had to purchase in stabilization operations (they may be traced to the dealer who was supposed to have sold them effectively).  It is also conventionally provided that the selling group dealer in turn may make a specified "re-allowance" (portion of his own concession) to other dealers not members of the selling group.

The total underwriting spread (difference between public offering price and net price to the issuer) will be distributed three ways:  the management fee to the syndicate manager, the underwriting share (purchase group), and the selling commissions (selling group's concession).  Expenses of the offering, some of which the issuer may specifically agree to bear in the purchase agreement, are deducted before making the division.

Competitive Bidding Practice.  

The above procedure refers to conventional underwriting by private negotiation.  Competitive bidding, which is required for public utility issues under the Public Utility Act of 1935 (pursuant to rule of the Securities and Exchange Commission) and for railroad securities (pursuant to the rule of the Interstate Commerce Commission), necessarily affects the procedure for syndicates.  The process begins with the issuer's "statement of terms and conditions" and invitation for bids.  (Some firms begin even sooner - as soon as the prospective financing is "firm" enough - so as to form strong syndicates.)  The major firm forming the syndicate invites other firms to become members and confirm; a "major" participation would be one equal in size to that of the manager and participation would be one equal in size to that of the manager and of any other member, minor participations ranging downward there from.  Before the effective date, the issuer stages "briefings" for the interested groups and supplies documentary and descriptive data.  Each group in turn has meetings among its member firms, who a few days before submission of the bid execute and sign the agreement among such prospective purchasers, specifying participation (which may be increased by 10% without special agreement, usually, to allow for "dropouts"), appointment of the manager and determination of his fee, sharing of expenses whether or not the bid wins, the authorization of stabilization operations by the manager if the bid is successful, etc.

The final meeting of the bidding group is usually held on the very morning of the day specified by the issuer for submission of bids, so that the bid may reflect the latest market conditions.  Submission of the bid makes possible determination by the manager of the selling concession to dealers and the public offering price.  Subject to the terms and specifications of the issuer, the winning bid is determined, usually on a "lowest cost of money" basis to the issuer.  The successful group's manager then swings into action for distribution through the selling group and directly to institutions, and bidding group firms are allocated their "take-downs."  The first act by the manager is to sign the purchase contract with the issuer, on behalf of the winning group, provisions of which were previously furnished to prospective bidders by the issuer for information.

Impact of "Shelf Registration."  

Rule 415 of the SECURITIES AND EXCHANGE COMMISSION under the Securities Act of 1933, adopted for a nine-month trial period on February 24, 1982, called for a corporate issuer to file a single S-3 registration to cover the total amount of securities it will put "on the shelf" for issuance in the next two years.  Since the traditional underwriting firm that has handled the corporation's offerings on a negotiated basis in the past is not specified, it is expected that despite the traditional ties, fiercer competition for the business from other underwriting firms may develop and/or the corporation may more readily change its traditional underwriter ("originating" underwriter).

Banks as Underwriters.  

Pursuant to the BANKING ACT OF 1933, banks may underwrite only U.S. government securities and other "Federal area" securities, as well as general obligation state and municipal securities.  In recent times the U.S. Treasury has offered Treasury bills on a competitive bidding basis, and other marketable securities on an auction basis.  State and municipal securities are issued on a competitive bidding basis, a traditional requirement of state and municipal laws.  Therefore, money center banks active in municipals form syndicates for bidding on such new issues, or become members of the same.  Banks in recent years also have urged modification of the Glass-Steagall Act to permit their underwriting of revenue municipals, a move opposed by nonblank underwriters in this field.


Loans participated in by multiple banks and other institutions where the overall credit involved exceeds an individual lender's legal lending or other limits.  One bank in the syndicate usually acts as agent for the other institutions.  

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