The Growth of Syndicated Loans in Australia

Syndicated loans have experienced significant growth in Australia, surpassing corporate bonds as a major component of business debt. These loans are utilized by firms for various purposes, including project finance, mergers and acquisitions (M&A), and general business needs. Refinancing existing loans also plays a significant role in syndicated loan commitments. While new lending activity focuses mainly on general purposes, project finance commitments have remained steady, and M&A activities contribute to variations in overall commitments.

Borrowers benefit from syndicated loans as they provide access to larger loan sizes with medium- or long-term maturities. Compared to the corporate bond market, syndicated loans offer greater accessibility and more flexible terms through multiple facilities. This is particularly advantageous for smaller firms that may face challenges in issuing corporate bonds. However, the presence of multiple facilities in a loan can lead to higher transaction costs for borrowers.

Lenders also benefit from syndicated loans through risk diversification, access to foreign markets, efficient monitoring, and easier renegotiation. Syndication allows lenders to share credit risk and comply with regulatory requirements by avoiding excessive exposure to a single borrower or industry. Foreign lenders can enter the Australian market through syndicated loans. Lenders can effectively monitor borrowers and conduct due diligence, while the presence of covenants in syndicated loans facilitates easier renegotiation compared to corporate bonds.

Syndicated loans are priced with variable interest rates based on reference rates such as BBSW. Larger loans tend to have narrower spreads, while M&A loans have wider spreads due to increased risk. Australian borrowers commonly use BBSW, while the transition from LIBOR to alternative rates like SOFR has occurred for US dollar loans. Average spreads on syndicated loans have increased since the Global Financial Crisis due to various factors. The interest rates on syndicated loans are comparable to or higher than rates on variable-rate loans and BBB-rated corporate bonds. Syndicated loan spreads can vary widely, particularly for riskier M&A loans. When considering loan and borrower characteristics, it's important to note that syndicated loans may not necessarily be cheaper than bilateral loans.

Source: https://www.rba.gov.au/publications/bulletin/2023/jun/syndicated-lending.html