What is the difference between loan syndication and a consortium?
In a very general sense, a consortium is any group of individuals or entities that decides to pool resources toward a given objective. A consortium is usually governed by a legal contract that delegates responsibilities among its members. In the financial world, a consortium refers to several lending institutions that group together to jointly finance a single borrower. These multiple banking arrangements are very similar to a loan syndication, although there are structural and operational differences between the two.
While a loan syndication also involves multiple lenders and a single borrower, the term is generally reserved for loans that involve international transactions, different currencies and a necessary banking cooperation to guarantee payments and reduce exposure. A loan syndication is headed by a managing bank that is approached by the borrower to arrange credit. The managing bank is generally responsible for negotiating conditions and arranging the syndicate. In return, the borrower generally pays the bank a fee.
The managing bank in a loan syndication is not necessarily the majority lender, or “lead” bank. Any of the participating banks may act as lead or assume the responsibilities of the managing bank depending on how the credit agreement is drawn up.
Like a loan syndication, consortium financing occurs for transactions that might not take place with a single lender. Several banks may agree to jointly supervise a single borrower with a common appraisal, documentation and follow-up. Consortiums are not built to handle international transactions such as a syndication loan; instead, a consortium may arise because the size of the project at hand is simply too large or too risky for any single lender to assume. Sometimes the participating banks form a new consortium bank that functions by leveraging assets from each institution and disbands after the project is complete.