One of the most important things that the borrower and the MLA has to organize and negotiate at the very early stage of the syndication process, is how much will it pay the syndicate for the organization of the funding of the SPV itself. Typically what happens is that the relation is one-to-one relation between the borrower on one side and the mandated leader ranger on the other side. These two parties typically negotiate the total bulk of fees that the borrower will have to pay to the whole group of banks that are assembled in the to be syndicate. This total amount of fees goes under the name of arranging fee. And typically it is proportional to the total amount of funding that the syndicate will provide to the special purpose vehicle itself. In order to understand exactly what happens you must take into the account of the fact that the borrower will pay the fee only once, in total the amount to the MLA. Then, it is a problem of the MLA to negotiate the level of fees that other banks, that will been invited in the syndicate, will receive for that participation. And this is the second important part of the negotiation, because you must understand that all the banks that will be invited by the MLA to join the syndicate will try to extract as much value as possible from the MLA. On the other side, the MLA will try to negotiate in order to retain the most part of the fees for himself. Inviting other banks for just a fraction of the total amount of fees that the MLA has received from the borrower. In order to to exactly understand what happens, I think that the best idea is to use a sort of an example that we can use in order to drive our discussion. So, let's assume that we want to analyze a 200 million Euro finance project. That is organized by one MLA and where the borrower has decided, has agreed to pay 1% of 200 million to the MLA as the compensation to the MLA for the organization of the syndicate group. So, you can understand that the first step of our calculation will be to calculate. One percent times 200 million that returns you a total amount of 200 million Euros which represents the total bulk of fees that the MLA has available for itsself and for the other banks that will join the MLA at a later stage of the process. Suppose now that the MLA decides to propose to other banks the following terms and conditions. First of all, for banks who will join as a co-mandated lead arranger. I can propose a co-arranging fee of 0.8% and to banks that participate without underwriting the loan, but only as pure participant, I can propose a fee of 0.2%. This fee goes under different names. Typically, it is called up-front management fee. Sometimes you will find it defined as closing fees or participation fees. These are all synonyms. Suppose now that our syndicate is formed in this way. Here we have our Mandated Lead Arranger. This Mandated Lead Arranger invites in the syndicate group, one co-mandated lead arranger, and so, we have one bank. Suppose that you are Bank B, the mandated lead arranger, and you invite another bank, Bank C. That is playing the role of underwriter or co-mandated lead arranger. Then, the Mandated Lead Arranger and the other underwriter, the Co-Mandated Lead Arranger, start inviting other banks. In particular, in this syndicate, we suppose that three other banks, named Bank D, Bank E, and Bank F, are invited with the simple role as a lead manager. As you can appreciate in this table, we have different columns that can tell you which is the situation of the syndicate, once the syndicate is formed. The different roles of the banks, and a couple of columns that indicate the underwritten amount and the financed amount. Let us comment on the different information together. The first column indicates all the different banks that belong to the syndicate. So you have Bank B, Bank C, Bank D, E, and F. Next column indicates the role that every bank perform in the syndicate. As you can appreciate, Bank B plays the role of Mandated Lead Arranger. Bank C plays the role of underwriter, or also it is known as a Co-Lead Arranger. Then you have the three other banks. So Bank D, Bank E, and Bank F, that simply provide money without underwriting any amount. They are defined as Lead Managers. The next column indicates the underwritten amount by the different tiers of banks. And as you can appreciate. As you can remember from the previous session, essentially only the first tier of banks, the group of underwriters, underwrite the loan. In particular in this case, we have split evenly the underwriting commitment between the MLA on one side, and the other Co-Lead Arranger, Bank C, on the other side. The two banks underwrite exactly one-half of the loan. 100 million, Bank B, 100 million Bank C. Then, as you can appreciate in the last column. We can exactly understand what happened in the second stage of syndication, where both the MLA and the other Co-Lead Arranger, sell down portions of the loan in the market. What has happened? Very easy. If you look at the final column, you see that the amount that will be lent by Bank B has fallen from 100 million to 25 million Euros. This means that Bank B was able to sell down 75 million Euros loans to other banks. Bank D, Bank E, or Bank F. The same holds true for Bank C. Bank C had an original underwriting commitment of 100 million. And as you can appreciate for the last column, the final amount lent by Bank C, has fallen from 100 million to 25 million. Meaning that again, 75 million loans have been placed in the market to either Bank D, Bank E, or Bank F. As you can appreciate again by looking at the amounts that Bank D, E and F are ready to lend, you can understand that, if you look at Bank D, Bank D takes responsibility for lending the amount of 40 million. Bank E for an amount of 50 million or Bank F. But a final amount of 60 million. Please notice that if you sum these three amounts starting from the bottom going to the top. 60 million, 50 million, 40 million, you get exactly 150 million, which is exactly the amount that Bank B and Bank C have placed in the market. At this stage, we clearly note which are the roles, which are the amounts and which is the underwriting commitment for the first tiers of banks. We are now ready to start the calculation of the fee distribution. In order to understand how much every bank will get from this syndicate. In order to follow me in the reasoning, you must think about the field distribution as a waterfall of payment. And the waterfall is very easy to understand. The money is captured by the MLA, and the MLA then disperses money to all the other banks. It's like having an initial amount of money, that then flows down to the other members of the syndicate. Let's start from the beginning. The borrower pays 1% overall fees to the MLA. 1% of 200 million returns an amount of two million Euros. This amount is received by the MLA. The MLA now pays 0.8 a co-arranging fee to Bank C. As you remember, Bank C committed an underwriting amount of 100 million Euros. So the first payment amounts to 0.8% times 100 million. Which amounts to 800,000. You can appreciate that at the end of this stage, we have the original amount kept by the MLA, 2 million, minus the amount paid as co-arranging fee, 800,000. What is left for the MLA at this stage is 1,200,000. At this stage, the MLA has to pay for the lending activity of all the banks, and so we can refer to the final column that indicates the amount of money that every bank lends materially to the borrower itself. So we can start paying management fees, or closing fees. As we have named them before, to Bank C, Bank D, Bank E and Bank F, proportional to the amount of money that every bank would provide to the borrower that you can read in the final column of our table. So, take for example, Bank C. Bank C has committed to lend in the final stage of the syndication, 25 million Euro. Since the fee has been negotiated in 0.2%, 20 business point, Bank C is entitled to receive 50,000 Euros. If we move to Bank D, Bank D has committed to lend a final amount of 40 million. If you multiply 40 million times 0.2%, you get the total amount of fees of 80,000 Euros. And if you replicate the exercise for Bank D, E, and F, you can get exactly all the amounts that all the different banks will receive. So, Bank E will receive 0.20% times 50 million, so in this case 100,000 Euros. And Bank F, will receive 0.20% times 60 million. So, 120,000 Euros. Overall, in this stage you have paid a total amount of fees to Bank C, D, E, and F for their participation in the syndicate. Which is the sum of all the closing fees, which amounts to 350,000 Euros. Summing up the waterfall structure, you have received 2 million, you paid 800,000 for Co-Arranging Fee and then you paid 350,000. For closing fees to all the members of the syndicate. The bottom line that is retained by the MLA is the residual 850,000. Just a final point, it is interesting to notice that at the end of our exercise, the mandated lead arranger has retained a total amount of fees of 850,000 out of total bulk of fees of two million. You can also understand that these 850,000 are received for a final commitment to lend. Which is only 25 million. So if you calculate a very raw ratio, taking the total fees retained, divided by the final amount really lent to the borrower. You get a final return on investment capital. Which is 3.4%. Which is, more or less, three times as much almost compared to the original nominal value. Which is the bottom line of this reasoning? It is very simple. You negotiate with the borrower a 1% fee, but at the end of the syndication process, you get the fees lending a much smaller amount to the borrower itself. This is leveraging your return on invested capital three times as much. This is typical of the syndication process. There is a old saying in the syndication market. Where, typically, the MLA originates the deal to distribute the deal, and not originate the deal to keep the deal on it's own books. So my task is always to take responsibility for providing the organization of the syndicate. But keeping only a final small responsibility for the final ending in this particular deal.
