A syndicated loan is a debt jointly provided by at least two lenders to a borrower, and characterized by a mix of private and public debt (Dennis and Mullineaux 2000; Lee and Mullineaux 2001). The loan syndication market has features of both commercial and investment banking-a combination of "relationship loans" and "transaction loans," as Boot and Thakor (2000) put it. For syndicated loans, the lead arranger or bank screens borrowers and monitors their performance in a relationship-like context, and then sells some or all of the loan in a capital market-like context, which involves characteristics of relationship and transaction types of financing (Dennis and Mullineaux 2000).
Members of a loan syndicate are classified as either lead arrangers or participant lenders, and they differ in three ways (Sufi 2007). First, participant lenders do not negotiate directly with the borrower. Lead arrangers collect information and monitor responsibilities, and are responsible for providing lenders with detailed and confidential information on the loan and the borrower's performance. Lead arrangers also maintain a close relationship with the borrower. Second, lead arrangers unlike participant lenders hold a much greater percentage of the loan. And third, full agreement among all syndicate members is required for renegotiating rights or amending a loan's financial aspects, such as principal, interest, maturity, and collateral.
Sufi (2007) describes the loan syndication process in the following way: The lead arranger signs an initial loan contract or a preliminary loan agreement with the borrower. The loan contract stipulates the financial details of the loan, such as the amount, interest rate range, covenants, fees, and collateral. The lead arranger then looks for participant lenders to provide part of the loan once the contract has been signed. The loan agreement is finalized once participant lenders decide to become part of a syndicate, and the terms of a syndicated loan are the same for all parties. The borrower pays the lead arranger a fee for arranging and managing the syndicate; this is in addition to the interest and commitment fee income that the lead arranger receives. The lead arranger is the "agent bank" that performs various duties. These include monitoring the borrower's activities, which may affect the borrower's credit risk profile, setting the loan terms; administering the drawdown of funds, calculating interest payments, and enforcing financial covenants during the life of the loan.
The market for syndicated loans is a major source of funding for project infrastructure. In developed countries, syndicated loans are widely used as source of financial capital for these projects because a larger share of infrastructure financing comes from debt markets than equity markets (Esty and Megginson 2003). Some countries in developing Asia are starting to use syndicated loans to finance infrastructure projects. From 2011 to 2016, these loans totaled an estimated $56 billion in India, Indonesia, Malaysia, the Philippines, the Republic of Korea, Thailand, and Viet Nam. But this is still small, given the region's financing gap for infrastructure.