What was the origin of the idiom, "a piece of the pie?" It was thought to have been first used sometime in the mid-to-late 1800s, referring to the division of a certain piece of land or limited resource that multiple parties needed to share. Since then, the use of the idiom has broadened to include any time an opportunity could be shared by all stakeholders.Community financial institutions (CFIs) have an opportunity to get a piece of the pie, while diversifying their portfolios and reducing risk, by participating in or purchasing portions of shared national credits, also known as syndicated loans. These loans are typically originated by larger financial institutions and involve multiple lenders sharing both the funding and the credit risk, providing CFIs with access to larger, well-structured loan facilities.According to the banking regulators’ Shared National Credit Program, which reviews and classifies large syndicated loans, a shared national credit is any loan or group of loans with an aggregated value of $100MM or more, either shared by three or more financial institutions or with a portion sold to two or more institutions that assume their share of the credit risk.In a January 2024 report by McKinsey & Co., the syndicated loan market has historically been stable and resilient, though it saw a temporary decline in 2020 due to the pandemic. However, the market rebounded and has since grown at a compounded annual growth rate of 4%. In 2022, US deals represented slightly more than half (53%) of the $5.1T in total deal volume globally.By 2023, total corporate lending in the US exceeded $2.1T, according to the Loan Syndication and Trading Association. The investment-grade market — approximately $1.1T in 2023 — mainly consists of revolving credit facilities to larger, well-established companies.The Role of CFIs in Syndicated LoansCFIs can tap into this robust syndicated loan market to diversify portfolios, manage risk, and gain access to nationally and globally recognized borrowers. Syndicated loans offer CFIs opportunities to participate in senior secured, floating-rate loans, often with short-term maturities, allowing institutions to spread risk while benefiting from larger, institutionally underwritten credits.Syndicated loans typically provide:
- Portfolio Diversification. CFIs can diversify their exposure across different industries and geographies, reducing concentration risk.
- Access to High-Quality Borrowers. These loans often involve nationally recognized companies with strong credit profiles.
- Shared Credit Exposure. CFIs reduce individual credit risk by sharing it with other financial institutions.
Syndicated Loans vs. Organic Loan OriginationFor CFIs considering syndicated loans, here’s a comparison between participating in syndicated loans and traditional organic loan origination:
- Time to Close Deal. On average, syndicated loans may take less time to review and underwrite compared to organic loans, which often involve building long-term relationships with borrowers and waiting for detailed documentation.
- Independent Credit Rating. Syndicated loans are typically rated by one or more major credit rating agencies, such as S&P, Moody’s, and Fitch, offering an additional layer of risk assessment. Organic loans often rely on internal or external credit reviewers.
- Choice of Borrowers and Industries. Syndicated loans provide access to a wide range of borrowers from diverse industries, often including publicly traded companies. Organic loans, on the other hand, are typically limited to borrowers within a local footprint.
- Liquidity/Secondary Market. Syndicated loans are typically more liquid, with a well-established secondary market for trading. Organic loans usually lack a secondary market.
- Financial Documentation and Access. With syndicated loans, CFIs benefit from more frequent and detailed financial updates, such as quarterly SEC filings and annual reports. Organic loans typically require annual financial reviews, often relying on borrower-provided information.
Leveraging Syndicated Loans for GrowthSyndicated loans present an excellent opportunity for CFIs to diversify their asset portfolios, reduce individual credit risk, and gain exposure to high-quality borrowers. Institutions that explore these options can benefit from increased portfolio liquidity, access to diverse industries, and the ability to participate in larger credit facilities that may otherwise be beyond their traditional lending capacity.Community banks interested in exploring shared national credits can benefit from the expertise of partners with experience in C&I lending and syndicated loans, such as PCBB. Working with a knowledgeable partner can streamline the process and provide access to well-structured opportunities that align with your bank's risk profile and lending goals.
