Corporate lending and syndicated loans

A source of income for banks are the fees related to the advisory services they offer clients (such as governments, corporations and private equity funds) on the best way to raise debt capital. Clients may need additional debt for several reasons, including the execution of an Initial Public Offering (“IPO”), the distribution of a dividend to shareholders, the refinancing of existing debt approaching the maturity date, M&A-related events (including leveraged buyouts) or when a company is undergoing restructuring or finds itself in a situation of distress. In addition to advisory services, banks arrange the syndication of the debt and can also use their own balance sheet to underwrite the issuance before it gets sold to investors in the market; underwriting and arranging a syndication in the so-called “primary” market is a further source of fees for investment banks. As banks place the debt raised on behalf of their clients to third-party investors, they are also referred to as the “sell-side”, with the “buy-side” represented by investors buying the debt. The investor base for debt products sold by banks is wide and includes several types of institutions: • Insurance companies, mutual / prime funds and pension funds: also known as “real money”, these are “traditional”, long-only players that invest the capital raised with little to no leverage. Their primary goal is to avoid defaults rather than maximize absolute fund returns. In recent years, several funds previously focused on private equity investments also expanded into credit funds, including KKR, EQT, Bain Capital; • Hedge Funds: investors whose primary goal is to maximize absolute returns. They often employ more aggressive strategies than those of “real money” investors that might include leverage. These funds are backed by a pool of sophisticated individual and institutional investors; • Collateralized Loan Obligations (“CLOs”): CLOs are asset-backed special purpose vehicles that invest and manage portfolios of loans. CLOs raise funds by issuing bonds (split into senior and subordinated tranches) backed by the payment flows of the portfolios of loans they buy in the market. These vehicles can have significant leverage; • Banks: their investments are often relationship driven. They participate with take-and-hold tickets in certain debt tranches with the expectation of securing further business with a client. Several major central banks also play in Government and corporate bond markets through asset purchase programs such as the ECB’s PEPP (Pandemic Emergency Purchase Program); • High Net Worth Individuals. Syndicated Loans are part of the “straight debt” (i.e. non-hybrid) products that banks offer their clients. A Syndicated Loan is a commercial loan provided to a borrower by a group of lenders and structured and arranged by a group of commercial or investment banks (the “syndicate”). Not all loans are syndicated, as loan facilities can be negotiated individually or bilaterally with a counterparty.