For many infrastructure projects, there will be one bank or a small group of banks (usually referred to as the arranger or lead arrangers) that will negotiate the lending terms. These banks may also underwrite or provide in full the total amount of lending required. However, even when the amount of funding is fully underwritten, banks will usually want to distribute parts of the lending (commonly referred to as sell down or syndicate) to other banks. In this way the banks can limit their exposure to any one transaction and spread their lending capacity and risk across a range of opportunities. In the infrastructure market, the final amount (or final hold) any one bank will want to hold can vary significantly by sector, market, and geographic place, but it is unlikely to be more than US$150 million.
The sell-down or syndication process will typically take place shortly after a transaction has been concluded. In many respects, the process is a risk that sits firmly with the private-sector parties. However, in some circumstances the public sector may have an interest in this process. This occurs when the equity investor retains some risk that-should the arranger bank(s) not achieve their target final hold amount-the lenders may require a change in their loan pricing or fees (to make the proposition more attractive to other banks) or in the loan structure. Such changes may reduce the potential level of return for equity investors and also reduce any contingency in the project. Both reductions might have the effect of weakening the ability or desire of the equity investors to deal with deterioration of the transaction economics or to deal with the unexpected. This is of particular concern when the project revenue is fixed and any additional costs cannot be passed on to users.
We have just described the "arrange and syndicate" process common to many bank-financed transactions prior to the 2008-09 banking collapse. During and after this banking crisis, very little infrastructure-related debt has been arranged on a syndication basis. Instead a "club bank" approach (a type of "arrange-and-hold" approach) has been used. In this approach, a number of banks need to collectively arrange the debt so each bank is prepared to arrange and hold a fixed proportion of the collective debt-a proposition that can be extremely complicated to implement. However, when taking this approach, the amount each bank will arrange and hold will be less than the amount they would have been prepared to underwrite and syndicate. There are two issues with the club bank approach for borrowers:
• First, large loans will need many banks to come together. So, if the maximum amount a bank will arrange and hold is between US$75 million and US$150 million, then a US$750 loan will need between 5 and 10 banks. With an arrange-and-syndicate approach, only 2 or 3 banks would have been sufficient.
• Second, working with such a large group of arranging banks means that the negotiation of the facilities could be complex and time-consuming. Also, terms may need to come down to the lowest common denominator in order to reach a deal.
The reason for the move to club deals has come about primarily because individual banks lack confidence in other banks' appetite for syndicated debt, the terms and pricing that those other banks may demand, and the interbank risk being taken.