All You Need To Know About Loan Agencies
Posted on: 21 April 2021
The loan and financial markets receive financing requests for massive projects. Such projects emanate from large corporations and governments. A company may wish to finance a new factory or buy out a competitor, while a government may want to finance infrastructural development. Those colossal projects require a substantial financial investment. The financing usually comes from a syndicate of financial lenders. This intricate financial web requires the mediating role of a loan agency.
What is Loan Agency?
Loan agencies deal with the analysis of syndicated loans. In particular, a syndicate is a group of financial lenders who collaborate to finance a specific project by a borrower. The lenders offer a syndicated loan. The syndicate may offer the loan as a lump sum amount or provide a credit line.
The following are the main reasons why lenders offer syndicate loans:
- When the amount borrowed is too huge for one lender
- The desire to spread the risk of a considerable loan
- The desire to share the financial opportunities of a massive project
The consortium of lenders agrees on the terms of financing through negotiation and documents the agreement. This agreement gives rise to the need for a loan agency. The role is played by an independent loan agent. The intermediary implements the terms of the agreement between the lenders and the borrower.
Loan Agency Roles
Inter-creditor agency: This role involves monitoring the covenants between the creditors. The main task is to coordinate, manage, and document all resolutions and issues arising from the lenders' discussions. Such matters may include voting and dissenting during meetings. More so, it entails monitoring and controlling the financial obligations among the lenders. Finally, the loan agent manages amendments to the agreement, such as additional funding or interest waivers.
Administrative agency: The role facilitates the administrative tasks between the borrower and the lenders. Firstly, the agent collects all the compliance materials from the borrower. Then, the loan agent facilitates borrowing by calculating the interest rates and setting payment rates. The agent manages cash by disbursing funds to the borrower and payments to lenders. Moreover, the role entails maintaining a loan register, sending payment notices, and monitoring loan repayment.
Security agency: A loan agent manages the loan security for the lenders. In this case, the intermediary receives, processes, and maintains the collateral deeds. The task also includes calculating loan to value ratio, the renewal and release of the securities. Besides, a loan agent enforces security penalties in case of default.
Mega investment projects are financed through syndicated loans. The loans allow lenders to fund huge loans and share credit risk. The loan agency mediates the relations and obligations between the consortium of lenders and the borrower.
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