What is considered a reasonable interest rate for a syndicated loan?
A 2010 survey of syndicated loans found an average interest rate of 7.9%. However, most syndicated loans are variable interest rate loans that are periodically reset to a specified spread above a base rate, usually the prime rate or the Bankil rate, although other basic options with a fixed rate can be used. The size of the spread above the specified base rate depends on the size and risk level of the loan. Typical spreads above a basic rate range from 3 to 7%. In many syndicated loan agreements, the borrower can lock a given interest rate for a maximum of one year.
In addition to paying interest on the loan, the borrower is also subject to fees, including a prepayment, a usage fee when using a revolving credit account above or below a certain level, and an annual administrative fee paid to the arranger.
A syndicated loan is a source of financing provided by a group of lenders, a syndicate. Syndicated loans are usually structured, arranged and managed by one or more commercial or investment banks, known as lead arrangers.
Syndicate loans enable companies to raise very large amounts of capital if the risk is considered too high for a lender to fully accept the loan. The syndicated loan market expanded for the first time in the United States with large leveraged buyout loans in the mid-1980s and in Europe in 1999 with the introduction of the euro.
The basic idea is that arrangers play the investment banking role of attracting investor money for an issuer seeking capital. The publisher pays the processor a fee for the service, a fee that increases as the complexity of the loan and risk factors increase. The most advantageous loans are loans that are provided to lenders.