SYNDICATED LOANS: A SOLUTION FOR LARGE SCALE PROJECT FINANCING
In banking practice, large financing needs often cannot be borne by a single bank due to funding limitations and high risks. As a solution, a syndicated loan is employed, namely a loan jointly extended by several banks to a single debtor under one agreement, serving as a source of financing so that large-scale projects can be carried out with shared funding and risk.
Definition of Syndicated Loans
A syndicated loan is a credit facility jointly provided by several creditors, generally consisting of banks and/or other financial institutions, to a debtor typically a legal entity for the purpose of financing one or more of the debtor’s projects.
Syndicated lending arises because the amount of funds required to finance a project is often too large to be provided by a single creditor. Therefore, the syndication mechanism functions as an alternative solution when the loan amount exceeds the capacity of one bank.
Characteristics of Syndicated Loans
According to Budhiono Budoyo in his book “Business Aspects in the Establishment of Syndicated Loans and the Responsibilities of Each Party Involved”, citing Stanley Hurn, syndicated loans contain several essential elements:
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- More than one financial institution participates in arranging the loan;
- Each syndicate participant extends the loan under uniform terms and conditions;
- A single loan agreement governs all parties;
- The syndicate is administered by an agent bank on behalf of all lending banks.
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Types of Syndicated Loans Financing
There are three types of loan agreements within a syndicated loan mechanism:
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- Working Capital Loan: a loan granted to support the day-to-day operations of a company, such as salary payments, lease expenses, or debt servicing.
- Investment Loan: financing provided for business expansion, asset acquisition, or investment activities, such as purchasing new factory equipment or acquiring another company.
- Hedging Facility: an investment strategy intended to mitigate future risks arising from adverse price fluctuations of assets, functioning similarly to insurance by using financial instruments to offset potential losses.
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Collateral in Syndicated Loans
In every loan application, banks generally require collateral to mitigate the risk of default. In syndicated loans, the form of collateral depends on the project being financed but generally does not differ significantly from that in ordinary loans. The method of security perfection is largely the same, with some additional arrangements as necessary.
Generally, two forms of security are recognized, personal guarantee and real security (security interest in property). A personal guarantee is provided by a third party to assure the creditor that the debtor’s obligations will be met in the event of default. Real security, as stipulated under Articles 1131 and 1132 of the Indonesian Civil Code, subjects all of the debtor’s assets to liability for his debts, which may be sold through public auction, with proceeds distributed among creditors proportionally. Such security is perfected through pledge, mortgage, fiduciary transfer, or security rights over land and administered by a security agent.
Conclusion
A syndicated loan functions as a collective financing facility extended by multiple banks to support large-scale projects beyond the capacity of a single bank. This mechanism operates under one agreement and is managed by a syndicate agent, with financing forms including working capital, investment, and hedging. Collateral may take the form of personal guarantees or real security, perfected in accordance with applicable law.
Legal Basis
Civil Code.
Author :
Evi Mutiara
Petrus Gabe Pandapotan
Editor :
Muhammad Arief Ramadhan S.H.