The Need To Write This Article In The First Place
The role of debt arrangers has always cut both ways. In the Indian context predominantly, it has been always misunderstood as just anyone who brings together a lender and a borrower. But are all of them really debt arrangers or syndicators?
Surely not!
And that’s precisely what we try to explain with our years of experience into this business. Well, we try and discuss who actual debt syndicators are, what they do, what is their scope of work is in a country like India, and where are the points where they can go “beyond” their modus operandi and bring unparalleled value to one’s table.
Our strong sentiment which stems from our experience and observations in the market has led us to write this article and shed light on how the value proposition of syndicators is distinct in all types of transactions they undertake.
A Little Background
We need to understand that syndication as a business and syndicators as people are not a new phenomenon. This investment banking arm has been around since late 19th century post-Civil war in America and the Great Depression. The investment banks gained prominence in the Americas due to surge in demand of capital and with American banks being unable to meet them, it was then when investment bankers came in as matchmakers.
Initially, a lot of German-Jewish Investment banks were instrumental in the capital formation process in America and Europe. Majors like Goldman Sachs/Lehman Brothers dominated the space and later JP Morgan went on to become the biggest of them. However, the banking crisis of 1907 in America questioned the role of investment bankers in bringing down the traditional banking arena.
This led to several steps being taken by the US government in avoiding conflict of interest between commercial banks and investment banks. The industry, over the years, has undergone several transformations and changed trajectories with every major crisis or periods of growth.
Investment Banking And Debt Syndication In India
The Indian investment banking era largely began with setting up of SBI Caps in 1986.
The homegrown investment bank went on to become a top-ranked investment bank not only in India, but in the entire South Asia region. As a natural synergy to SBI’s core banking business, SBI Caps set up a syndication and debt restructuring arm as well, which became the lead arranger for every major debt transaction happening in India.
However, later, with many such large borrowers later defaulting and SBI Caps still playing a major role in restructuring and dictating terms to lenders, this caught the eyes of regulators and the conflict of interest once again came to the fore, with SBI Caps virtually ending its syndication business.
Owed to the kind of players which came into the debt syndication arena in India, we intend to showcase a distinction between institutional or bulge players, market challengers (or boutique players), and unorganized players (we’ll go deeper into talking about why should specifically avoid this category).
Here, institutional lenders such as banks and NBFCs focus generally on government projects and businesses (large scale transactions), compete for space in the capital market transactions but have limited lender outreach. On the other side, the unorganized players are generally “seasonal syndicators” who exit the market in bearish conditions and rely on 1-2 clients and investor relations.
Lastly, the boutique firms or market challengers have the advantage of wider lender outreach but have limited capital market penetration.
The nuances of these different players in the syndication business, the need of proper debt syndicators, and the dire requirement of a regulatory system for syndicators in India further forms the basis of the article.
So, without further ado, let’s dive in!
What Is The Need Of Debt Syndicators And What Do They Actually Do?
Conceptually, we first need to understand that why is there a need of a debt syndicator in the first place for companies. People tend to believe that in most cases, syndicators facilitate transactions with lenders because of various reasons.
It could be because of the inability to carry out the said transaction on its own, an inherent lack of bandwidth, or if it is felt that the syndicator will bring some distinct value addition to the table which isn’t present with the current resources. That’s because for a running business, its expertise isn’t raising funds or syndication but the core competency on which the organization is built.
Having said, there are various large organizations with their own treasury teams, finance heads, etc. who look after their fundraising needs. So, in my opinion, the syndicator’s role is becoming something beyond a facilitator in terms of identifying lenders, structuring a transaction, going to lenders for daily follow ups, getting the results on the table, negotiating on behalf of the clients, protecting the interest of the lenders, etc.
The Disparity Of Perception Of Syndication As A Business In Developed Countries And Developing Countries Like India
Therefore, the concept of syndication is looked in a very different light in developed countries, predominantly in the shape of a white-collar investment banker where the clients understand the value being brought to the table by the said person. In developed countries, you’ll hardly find people approaching lenders directly, with there being intermediaries in the form of these bankers who help.
A lot of this disparity between developed countries and developing countries like India comes from difference in the regulatory network. You have a regulatory framework which binds the borrower, the lender, the arranger, and other stakeholders by a common thread (in developed countries). In India, the regulation is weak as syndicators aren’t regulated and only banks and borrowers are.
So, there is a tendency to undertake transactions which aren’t genuine, or which are quick revenue-churners for the syndicators but detrimental in the long run to the interest of the bank and the borrower.
Here, there are no entry barriers. And by that logic, any person who can patch in a borrower or lender together can refer to himself as a syndicator. The said person may not even have the core expertise in fundraising and may not understand the intricacies of finances, be it financial statements, projections, financial analysis, RBI circulars, etc. That’s why syndicators don’t enjoy that magnitude of respect in India owed to the sector being highly fragmented, unregulated, and with the market being spread across a variety of players such as large players like SBI Caps or smaller, boutique firms or independent individuals.
Even the equity investment market for startups is regulated by SEBI, where equity-related investment products are more tailored towards the startup ecosystem but the luxury of being a regulated market is yet to be seen in the arena of debt syndication.
Looking At The Long-Term Value Addition By Debt Syndicators
Those who pursue syndication as a core expertise and then consequently as their business, there’s a definitive value addition which syndicators bring to the table. As a syndicator, you not only bring lenders on the table, but you structure their transactions year-on-year, do assessments for the clients, guide them on how they can rationalize their debt raise, figure out what terms will suit them going forward, etc.
Added to that, as a syndicator, you need to understand what the market is like, what the industry is like in which your clients are operating, and also incorporate factors such as how their competitors are turning around better structures, and how you can get those structures replicated on your company. These are some of the things you need to be vigilant about and undertake very judiciously to build the trust with your client. And the same trust needs to be carried to the lender side as well.
So, if you’re in the long haul when it comes to debt syndication as a business, you need to be clear and explicit on a few things such as:
- The kind of companies/clients you’re taking to the lenders/banking institutions
- The kind of transactions you’re undertaking
- The amount of homework you do for these transactions before taking them to the lenders
These aspects become particularly important because if you do a transaction with a bank which somehow goes south, you’re pretty much out of the bank’s picture for years to come and they refuse to entertain you.
In India, there’s anyway a lot of mudslinging which has happened in the name of syndicators. Take for example all the major defaults which have happened in the recent past, such as the likes of Nirav Modi, Bhushan Steel, Kingfisher (Vijay Malaya), the blame has been put on to the syndicators (even when the syndicator has been a respected name like SBI Caps).
It has been pointed that they syndicators didn’t give attention and didn’t prepare Viability reports or feasibility reports, etc true to the actual business. When the market and the business environment is good, people just go with the flow and it is when the market goes south, you sit and introspect.
It was following these issues that RBI pointed out the conflict of interest of SBI Caps in undertaking debt syndication as they have their own lending book, thus giving rise to a conflict. Following that, SBI Caps had to stop syndication.
How To Separate The Wheat From The Chaff In The Syndicator Market?
One needs to understand that syndication market is highly fragmented, unorganized, and if someone has to grow in this market and add value in the real sense, you need to be clear and transparent with your client and the lender in what you do, why you do, and how you do it.
Secondly, the lenders must also understand and should be okay with regulators coming in and defining a clear-cut checklist to accept transactions via syndicators and defining a clear-cut process/mechanism (which will inevitably benefit organized and long-term players). This will automatically have the propensity to weed out those who don’t pursue syndication as a core competency.
It’s imperative to understand that India, being a big country has umpteen number of lenders and borrowers. And therefore, big transactions inevitably require intermediaries for proper execution. So, rather than ignoring it, it is ideal to accept it and regulate the market so that the serious players stay, and the non-serious ones are weeded out.
Key Factors Which Have Impacted (And Will Impact) The Debt Syndication Market In India
Overall, the major impact to the syndication market will be because of the mergers/consolidation of the public sector banks in India.
And my personal take on that is that it’s a welcome move from the Government’s side which can help in reducing the inefficiency in the public banking system. The only issue is that on one side, RBI wanted financial inclusion and that is why they gave licenses to smaller banks for operation and now you’re looking to merge these banks for better structures and efficiency.
It’s a long-term process, because two dirty balance sheets won’t make a clean one. Therefore, I can’t say how the process will help right away. It might help down the line in bringing efficiency. But if a certain project requires INR 1 lac crore of debt, earlier let’s say it used to be divided into 25 banks and now, it’ll probably be divided into 10 banks now so therefore, the quantum of the amount will go up. From that perspective, I don’t know how the banking system will essentially cope with it. Then there’s the obvious aspect of integration of HR, processes, systems, mindsets, etc.
Regardless, the syndication business will get affected by this step and non-serious players would find hard to sustain. Nevertheless, now the number of choices will reduce owed to just 6-7 major banks coming into play and calling the shots on the big decisions. The bargaining power of the customers will reduce, and the role of the syndicators will become relatively limited, where they’ll probably be required to obtain the proper structures for transactions via these 6-7 major banks rather than getting involved in other aspects such as negotiation, etc.
Need Of A Regulatory Framework In The Debt Syndication Market And Why The Framework Hasn’t Come Until Now
Personally, I feel nobody has given it a thought to develop a proper framework. As simple as that. There are too many banks, there was a lot of inefficiency amongst the banking system itself as it wasn’t relatively process-oriented, so I think nobody gave it a thought amidst all this instability.
In my opinion, if such a regulatory framework were to come in tomorrow, it should clearly define certain key factors such as the minimum qualifications that that are needed for the individuals who qualify as people who can represent the borrowers for their requirements. You can have qualification criteria for the firms which want to register themselves as debt syndication agents for banks or on behalf of corporate clients, with clearly defined volume of transactions, the type of transactions, the number of defaults in the recent transactions which you’ve undertaken in the recent past.
With the right checks and balances, one can decide definitive, tangible parameters for this sector.
How Trust Plays A Part In A Fragmented Sector Such As Debt Syndication
The trust factor, especially keeping the present market in mind, is low on all fronts of the economy. And the same applies to syndicators. People/Lenders tend to look upon you with lack of surety regarding the type of transaction you structure for them.
Having said that, I still believe that if you’re a long-term player and have established that trust among lenders, you don’t face that kind of a challenge. Of course, you need to probably go and explain every time the kind of transactions that you have done and build some trust with the ongoing transactions and deals that you are running.
But yes, trust definitely has taken a beating and has eroded. It has eroded amongst all stakeholders in the banking and financial space. But I think it’s an ongoing process and as things improve, the trust factor will bounce back too.
All bankers and lenders are practical enough to realize that no public sector banking official has the time to go the market and support transactions and not all borrowers are capable of having and creating good treasury teams, which can go out and do the fundraising exercise. The other problem is that most of the corporate houses in the middle emerging segment have good accountants and good people who can take care of aspects like GST, accounting, audit, tax requirements, etc. but they don’t have a good team which can help them with their fundraising requirements and that is where syndicators come into the picture.
Changes Going Forward As The Indian Economy Stabilizes From Its Slowdown
For the syndication scenario, the economic slowdown in India has been a boon in disguise, by the way. It has filtered the short-term oriented and unfragmented players because as the lending environment has turned more cautious, more conservative, and more stringent, then all those people who were not career syndicators or not proper syndication professionals have been filtered out. And that’s why a lot of borrowers have moved to organized lenders for their requirements.
As the market improves, I still think it would be better for the organized syndicators because the short-term players that had to be filtered out would already be filtered out and the ones who are unable to withstand the tough times owed to a lot of cash burn would eventually be filtered out as well, as they’ll probably lack the courage to jump back into the market.
In the long run, it’ll only help people who are organized towards their approach in the syndication business.
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Written By
Amit Pandey
Amit currently leads Coinmen Capital Advisors as a Partner. Owed to his extensive experience of over 13 years in debt syndication, Amit’s knowledge on the topic comes from his time spent in public/private sector banking, financial advisory, and debt syndication for various players across a multitude of industries.