Today, we will talk about one of the most important aspects when we organize an infrastructure finance project. Whenever we have to deal with project financing itself, we have to ask a money to a group of private investors. It is important exactly to understand where to get this money from. And typically, what happens in the market for project finance and infrastructure finance, more generally, is to carry out the collection of money using the typical syndication strategy. >> Well, how would you define a bank syndicate? >> Well, if you resort to the help of banks, the bank syndicate is essentially a group of banks. So banks get together in order to provide financing to one specific borrower, the special purpose vehicle, that is in charge to organize and set up the infrastructure project itself. In this sense, it is group, but inside this group, not all banks play the same role. As we will see later, there are different roles that are covered by different banks. And the structure of a syndicated is typically a hierarchical structure. You must imagine sort of a pyramid with the most value added roles laid at the top and the least important roles. I don't want to sound a little bit impolite, but the most trivial role, so essentially lending activity performed on the bottom side of the syndicate itself. >> I see, why are bank syndicates so used in project and infrastructure financing? >> Well, there are many reasons why syndication has become one of the most important strategy in project finance. I would say in general, when you have to collect a large amount of money, the main reason, I would say, is due to the fact that infrastructure typically triggers a huge amount of money to be invested. And so any bank is in the financial position and financial strength to keep all this bulk of financing on its own books. This is due to economic reasons, sometimes is due to regulatory reasons and capital absorption. But in general, it is a way to share a risk of this huge amount of money, where the other possible co-partners in the syndication process. So the first reason is basically the fact that you want to share the risk with other banks. So you get the mandate to organize this bulk of financing, and you try to share this risk with other banks. The second reason is somehow a little bit trickier argument, but it is very important. If you, at the end of the day, invite other banks to join you in the syndication process, when you invite a bank, you, I would say, strengthen the business relationship with this other bank. Suppose, for example, that we are talking about syndicate, and that is organized by one of the leaders in the market. I don't know if you can name them. Let's take [FOREIGN] or [FOREIGN] or Dutch Bank. When Dutch Bank invites some other banks in the syndicate, it is obvious that these other banks typically will invite Deutsch, when they receive the mandate to organize another part of the finance transaction. So at the very end, what happens is that syndicates becomes an interesting way to strengthen marketing relationship among banks. You invite me to be part of your syndicate. Very likely next time, I will be in the position to organize this kind of syndicate. I will remember that you invited me, and very likely, we'll invite you. That's why it's not a case that typically in this kind of transaction, there is a tendency to concentrate market shares in the market. This is not the case. Because if we invite reciprocally, ourselves, this is another way to strengthen this kind of business relationship. >> And so what are the most tricky parts in setting up a syndicate? >> Well, there are many tricks that we must solve when we organize a syndicate. If you put in yourself in the shoes of the organizer of the syndicate, when we call it mandated ranger. Because it is the bank that will assist the mandate to organize the syndicate. Basically, I would say that you have to solve two tricks. The first one is basically how many banks you want to invite in the syndicate. And you have the possibility to choose between two basic kind of strategies. The first one is to invite many banks. The second strategy to invite a much more reduced number of banks. And both solutions have pros and cons. Just let me give you some clues, some hints on this. If you invite many banks, it is obvious that you can share risk with a larger number of banks. So you will take a lower amount of risk on your books. The second big advantage is that if you invite many banks, there is a higher degree of probability that you can invite banks with more bargaining power. So when you will have to define how much of the fees you will pay to this bank, very likely, you will have the possibility to pay less than inviting a much more reduced number of very big banks. The third element is that if you invite many banks, basically you have the possibility to create a huge group of banks. And you can reduce the probability that the borrower declares bankruptcy in front of a large group of borrowers, and you can understand why. If you declare bankruptcy toward a large group of banks, next time, you will have the possibility or the need to resort to the syndication long market. These big group of bank will remind that in the past, you'll certainly default in front of them. Of course, when you have in front of you, a large number of banks, you have cold initial costs, and the cold initial costs explode from this point of view. Then you can maybe use the second strategy, which is invite not so many banks in the syndicate, which simplifies a lot of things because coordination becomes easier. On the other side, of course, you have some cons. A smaller number of banks typically requires that only big banks are invited, and big banks have strong bargaining power on their side and so probably will have to pay a large amount of fees to them. Of course, from this point of view, having a smaller number of banks is also great advantage from the point of view of the borrower because confidential information is preserved if you don't have in front of you a large number of banks. So the first key to make a point is, how many banks to invite? The second one is, which banks to invite? And again, you have to solve this tricky point. Typically, you will invite, I would say, friendly banks, banks that probably has worked with you in the past and that with which you have set up a very good business relationship. Or sometimes, it is the borrower itself that kindly suggests to you to invite some banks because it has worked with these banks. And so, it is something that the borrower ask you to include in the syndicate, the tool he work somehow is bank kind of relationship. It is a bank with which you have worked well, and so you strongly recommend to the mandated lead arranger to invite this kind of bank. The third, and probably the trickiest point, is which final take to have on your books. Let me explain, final take is the technical term that indicates the final amount that the mandated lead arranger will keep on some books. So you can take also the full responsibility for the full amount of money that you will lend to a borrower. But at the end of the day, at the end of the syndication process, you will retain only a small fraction of the whole amount. Well, you have to decide how much of this final amount you will keep on your own books. And you can understand that the tendency is always to sell down big portions of the loan, so that you commit only a tiny fraction of your capital. On the other side, you can also understand that you can't sell too much of the loan in the market. For the simple reason that if you sell too much, you send a very bad signal to the other banks. And the bad signal is that you are selling a lot of the loan because you are not trusting in the quality of the product itself. So you can understand that there are many tricky points that you have to go through, and this is really not the science part of the syndication process. But rather, the act part that you can learn only if you attract frequent in organizing this deal is very long and very successful.
