I completed my internship at Goldman Sachs a couple of weeks ago. My core team was in Corporate Loan Servicing. As a supply chain management and international relations student, I had zero knowledge of the world of finance – let alone loans. My whole educational experience has been about manufacturing, quality management, and cultural patrimony laws. I love that stuff, but for some reason, the loans world fascinated me.
First, what exactly is a syndicated loan?
In simple terms, it’s a loan that has multiple lenders. For example, if your company came to a bank and asked for $1,000,000, the bank may not have the resources (or may just want to mitigate risk) to give you that loan – so the bank goes to other banks and asks “would you like to contribute to this loan?” If the other banks, the lenders, agree, they become a syndicate and, therefore, a part of the syndicated loan.
A bank can either be a simple lender on the syndicated loan or hold even more responsibility by being the agent of the deal. Choosing to be an agent means that the bank will manage the relationship between the lenders and maintain contact with the borrower.
Why are syndicated loans important, especially in the COVID-19 economic environment?
Now that you understand the very basic components of a syndicated loan, you may be wondering how they play a role in our current circumstances? Think about it. We’re in a pandemic. Many businesses are suffering. Times are tough. This all means that businesses need more money to sustain their internal operations, and as a result, they are going to their banks and asking for massive loans.
The travel industry, for example, is a prime subject. No one is cruising in the Caribbean right now (sadly), which means large cruise lines are likely in need of money – lots of it. Many businesses in recent months have been tapping into their bank relations to acquire this money – and so the syndicated loans market is becoming very busy.
Why does any of this matter?
Loans are everywhere right now. Loans have been out in the world socializing in our environment – they’ve had the opportunity to leave their homes more than any of us. Many people don’t realize that although loans isn’t a very glamorous industry, it is incredibly important to sustain businesses, keep jobs, and make the world interesting. Loans are cool. I’ve called it.
From a financial perspective, the loans market is not a highly profitable one. I mean, you are giving money to a business – money is moving out of the bank. However, what these loans do to promote profit is that they encourage businesses to create other accounts with the bank – more profitable accounts, such as investment banking or global investment research.
I am eager to learn more about how syndicated loans operate in the urban investment space. What happens when banks come together to give money to city rebuilding projects? What happens when banks come together to fund public education? That’s the type of loans market I hope to contribute to in the future.