This week we introduces some of the ways that companies access funds for their s

Question

This week we introduces some of the ways that companies access funds for their short-term capital requirements. One such facility is known as a revolving lending arrangement, sometimes known as a revolver. Compensating balances are frequently a part of a revolver arrangement, yet it adds to the cost of financing to the borrower. How does a revolver work and what is a compensating balance? What are some of the advantages to the borrower of such an arrangement, and why might a borrower agree to a compensating balance as part of this arrangement? What are some other types of alternative financing that might be available?

Explanation / Answer

Borrowing by way of a loan facility can provide a borrower with a flexible and efficient source of funding. If a borrower requires a large or sophisticated facility or multiple types of facility this is commonly provided by a group of lenders known as a syndicate under a syndicated loan agreement. A syndicated loan agreement simplifies the borrowing process as the borrower uses one agreement covering the whole group of banks and different types of facility rather than entering into a series of separate bilateral loans, each with different terms and conditions. The purpose of this note is to provide guidance on various aspects of a syndicated loan transaction, focusing on the following: (i) the types of borrowing facilities commonly seen in a syndicated loan agreement; (ii) a description of the parties to a syndicated loan agreement and an explanation of their role; (iii) a brief explanation of the documentation entered into by the parties; (iv) the time line for a typical syndicated loan transaction; and (v) a description of the common methods used by lenders to transfer syndicated loan participations. The guidance in this note is given on the basis of a typical syndicated loan transaction undertaken in the European loan market as envisaged in the LMA Primary Loan documents and governed by the laws of England. This note is not intended to provide a detailed explanation of the provisions of the LMA Primary Loan Agreements - guidance on this is set out in the "Users Guide to the Recommended Form of Primary Documents" published by the LMA and available to LMA members on the LMA

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