B4
SEMINAR ON
DHAKA SUNDAY MARCH 23, 2014
SYNDICATION FINANCING IN BANGLADESH: PAST, PRESENT AND BEYOND…
However, due to syndication financing, it has been
possible for implementing large and innovative projects
by us and now we need to take it forward by following
international practices in project financing.
Convertibles (Bond) will significantly increase the
cash flow of any company. Potential cash flow
depends on the longevity of a debt. As entrepreneurs,
we face a lot of challenges. As we are going into the
age of globalization, our price points are meeting
international standards therefore requiring us to get
opportunities of financing deals at international standards. Otherwise, it will be difficult for us to compete
in the global markets.
Inauguration of the Seminar:
H.M. Ziaul Hoque Khan, DMD, IDLC Finance
Limited
Risk sharing, innovative financial structuring and meeting
large financing requirement in diversified sectors have
become possible due to loan syndication. Process of
involving a common lender group also results in better
appraisal of a projects. Recognizing the demand and
requirement of large funding, IDLC has been involved in
different loan syndication deals of various sectors since
the year 2000. IDLC has raised around BDT 41.2 billion
for 31 projects in diverse sectors.
However, IDLC believes that there is more in loan
syndication than just fund arrangement. Part of our
arrangement is to positively and proactively contribute to
the overall loan syndication market of Bangladesh in
different innovative ways. This seminar is part of our
effort to bring all the relevant stakeholders of syndication
in a forum to discuss the prospects, challenges and opportunities related to loan syndication and find out effective
processes and strategies that can lead to better management of syndication deals.
Md. Ziaur Rahman, Head of Syndications &
Structured Finance Unit, Dhaka Bank Limited
IDLC Finance Limited in partnership with The Daily Star has recently organized a seminar on “ Syndication financing in Bangladesh: Past, present
and beyond”. We publish a summary of the discussion.
Shahnoor Wahid, Editor, Special Supplements,
The Daily Star
PARTICIPANTS
We want our private sectors to grow and become stronger.
Financing is required to achieve this desired growth.
Syndication financing will boost up arrangement of this
required finance. As a responsible newspaper, we want to
see transparency and proper utilization of the fund.
Whoever takes the fund to start a business or for the
growth and expansion of the industry should utilize that
money properly and transparently in the priority sectors.
To ensure proper fund utilization, there should be some
sort of arrangement to check valves at different points of
syndication financing.
Key Note Presentation:
H.M. Ziaul Hoque Khan
Shahnoor Wahid
Kazi Farhan Zahir
A.S.M. Arif
Parvez Akhter, Senior Investment Manager, DEG
Mohammad Jahangir Alam
Kazi Farhan Zahir, Senior Manager, IDLC Finance
Limited
In simple words, loan syndication is financing a single
borrower by a group of lenders (called a 'Syndicate') who
work together to provide the required fund. Loan syndication happens under a set of common terms & conditions,
common security and better management of loan.
Loan syndication is required for financing large projects, complying with Bangladesh Bank's guideline of
'Single Borrower Exposure Limit'. It diversifies risks of the
lenders and builds reputation of the borrower as many
banks and financial institutions participate in the loan
arrangement to set up large sized projects.
In loan syndication, key stakeholders are sponsors,
lead arranger, participating lenders, multilateral agencies,
common legal counsels, regulators, independent engineers, procurement and construction contractors, insurance providers, surveyors and so on.
Term loan syndication is the most popular form of
syndication in Bangladesh. Now a days working capital
financing, foreign currency financing & LC facility are also
common in deal structure.
In 90's, some investors started undertaking comparatively large sized projects in our country. Considering the
risks potential of such large financing, Bangladesh Bank
asked financial institutions to introduce the idea of syndication. At present, deal size has become much bigger,
transactions have become more complex, number of
participants has increased, hybrid products have been
launched and new & nontraditional avenues for investment like tourism, aviation, etc. have been explored. In
the future, syndication deals are expected to be more
complicated, competition will be fierce, new sectors of
investment will emerge and new funds will be available.
At the same time, adoption of global practices, prioritization of environmentally & socially responsible projects
and energy efficiency will be an important part of loan
syndication.
We are facing various hurdles in loan syndication process. Some of these hurdles are failure in risk identification & diversification, weakness in equity management,
lack of human resource in both lender and borrower,
weakness in selection of equipment suppliers, preparation
of feasibility studies of complex projects, inadequate
monitoring of project implementation, lack of industry
information and political turmoil.
Loan syndication will play a crucial role in the coming
days. That's why multilateral agencies, foreign financiers,
local lenders and other stakeholders should work together
to expedite the loan syndication process. We need to
share our experiences with each other so that we can
manage syndication deals successfully. We need to create
a common platform where we can discuss different issues
and find effective processes that will result in better management of loan syndication.
Maroof ur Rahman Mazumder
Muhammad Hasnain Abid
Khan Md. Shamim Aziz
Parvez Akhter
Mesbah Uddin Ahmed
This common platform is the beginning for us to find new and innovative processes that can lead to
a better management of syndication deals. I hope this is the first of many such programs that will
bring us close together in implementing various loan syndication deals successfully. A summary of
the discussion we had in this program is as follows:
1.
2.
3.
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6.
8.
The very initial stage of syndication is, 'originating a deal'.
It is not only identifying stakeholders and projects but
also convincing the sponsor to entrust the deal to a particular financial institution where one has to clarify details
Hosne Ara Shikha
Md. Ziaur Rahman,
Mesbah Uddin Ahmed, Head of Structured Finance, IDLC Finance Limited
Mesbah Uddin Ahmed, Head of Structured Finance, IDLC
Finance Limited moderated the discussion session by giving
an overview of the event and opened the floor among the
session speakers. The discussion highlights are:
Mohammad Jahangir Alam, Head of Structured
Finance, The City Bank Limited
Imran Karim
Gazi Hasan Mahmood
7.
Nationalized Banks started loan syndication in the early
90's with deal size ranging from BDT 30-40 crore mainly
for term lending. In the late 90's, Grindlays Bank took
some significant initiatives to popularize the idea of syndication. ETV, Capital Papers Mills Limited & Apollo Steel
are to name a few of these successful syndication projects.
Amongst the local banks, Prime Bank played a crucial role
during 2000-2005 in introducing loan syndication while
IDLC also played a prominent role at that time through
arranging some landmark deals like Nandan Park,
Scholastica, Appolo Hospital, PHP projects. IIDFC played
also a prominent role during 2005-10 periods in loan
syndication especially for power projects. In this journey,
we have seen continuous increase in deal size, diversification of sectors for investment and complexity of the projects under syndication.
There are two types of foreign lenders: Commercial
Banks and Development Financial Institutions (DFIs).
Many DFIs have been working in Bangladesh for a long
time. They are facing various challenges. Financing cross
border is always risky. So before making any investment
in a country, they analyze the country's risk factors
which are related to overall environment of the country.
The legal/regulatory framework of the country is important as lenders would require their returns to be sent
back to their country of origin. Corporate Houses also
need to prepare feasibility/market studies of projects/business as per international standard and proper
transparency in corporate governance is required to
attract foreign lenders.
DFIs also emphasize on environmental and social
impacts of projects. They have a mandate to develop good
governance in the private sector. Any accident or hazards
related to health & safety create immense problems in
building the reputation amongst the foreign DFIs.
Maroof ur Rahman Mazumder, Director and Head
of Capital Markets, Standard Chartered Bank
Roundtable Discussion:
A.S.M. Arif, Head of Structured Finance, UCBL
The unique criteria of Syndicated Financing are to
accommodate different views and opinion of the different lenders. I think there should be scope of amendments of terms and condition initially set by the Lead
Bank and the borrower. In some organizations, agency
unit is separated from the marketing unit, which sometimes creates disruption in service delivery. We should
also minimize the completion time of syndication fund
raising which is currently a bit longer than any bilateral
transaction.
Cash flow based financing is less practiced in our country; we should definitely
take steps to adopt this practice more.
We need to be prudent and quicker in
introducing newer financing solutions.
More involvement with DFIs and international lenders is required.
Scope of adoption and accommodation
of additional terms and conditions after
launching of an IM should be present.
Agency unit should be under one roof
with deal execution unit to minimize
disruption in service delivery throughout the loan tenure.
All stakeholders in the syndication deal
should overcome the challenges of
financing new and innovative projects.
Issues related to foreign and multilateral
lenders should be addressed.
Norms of international syndication
should be adopted in the local syndication deals.
9.
10.
11.
12.
13.
of financing solutions of the deal. A sponsor always
requires the deal to be at the lowest cost.. At present, only
low cost financing arrangement is not the solution, one
has to be innovative in developing new types of solutions
for different types of the deal to attract the sponsor. When
a project is undertaken, the sponsor has to analyze
whether it is bankable or not. Both the lead arranger and
the sponsor have to analyze the feasibility of the project
at hand. When the lead arranger and sponsor are convinced that the project is feasible, the return to the lenders
is secured and return on equity is attractive, then a financing solution is developed. Once both agree on the financing solution, a 'Term Sheet' is prepared and mandate is
given to the lead arranger for arranging the required
funds. A deal is thus originated. Then the lead arranger
and sponsor prepare an 'Information Memorandum (IM)'
which contains the detailed project information viz. sponsors' information, market information, financial feasibility and risk mitigation measures, etc.. The lead arranger
then selects the potential lenders and the IM for their
participation.
Gazi Hasan Mahmood, SVP, NCC Bank Limited
From the loan syndication participants' point of view, it
can be said that when an IM comes to a participating
Bangladesh needs to develop a benchmark
interest rate like LIBOR that will work as a
reference rate for determining interest rate in
syndication and other complex financing.
PPP projects will create more opportunities for
syndication; we must be prepared to capitalize
the benefits of such initiative.
Legal due diligence should be made easier
and as per international standard.
Social and environmental due diligence should
be addressed while assessing a project's
merit.
Action Steps:
i) Forming a 'working group' for taking forward today's discussion outcomes.
ii) Creating a platform from this forum, for
example: creating a domain for uploading
IMs, closed Facebook group for sharing
ideas/opinion/event, group email, etc.
iii) Frequent programs like this event (seminar/workshop/training) may be arranged by
the concern Banks and FIs.
institution, there remain very little room for any change
or to add any point to the terms & conditions of the syndication deal. Thus we have to work within the boundary
as set forth in the IM constructed by the lead arranger and
the borrower.
Most of the projects under syndications are feasible
and attractive but all the lenders cannot participate
because some of them may not have appetite for that
sector or they may have reservation about the entrepreneur and also many other unavoidable reasons.
Imran Karim, Group Managing Director,
Confidence Group
As a sponsor, we expect more prudent financing solution
for large projects under syndication. I think the lenders
should give more concentration on the project cash flow
rather than additional securities. Usually, Banks and FIs
do not provide loan just depending on a project's cash
flow which is major impediment for our borrowing.
Newer and innovative financial solutions sometimes are
not accepted by the lenders regardless of the entrepreneurs or the project itself. I think sufficient cushion
should be given to the local sponsors as there are various
hurdles that need to be managed when implementing a
project.
Every financial market has several stages of graduation.
Bangladesh has just achieved local efficiency in syndication financing and now we are going to international
markets. For example, BPC has gone several times to the
international market for fund raising. Frequent appearance in the international market creates further scope for
international financing. Our local market has also some
limitations. We have to create a 'benchmark rate' like
LIBOR. It is often very cumbersome to determine credit
rating and other parameters.
On the other hand, Bangladesh has an excellent track
record of repaying foreign loans. So it helps our status as
an eligible borrower. Bangladesh is well known around
the world for garment product, peace keeping mission,
health performance but we are the least known in international financial market because we do not explore financing frequently.
To shorten our faund raisning time we can create a
domain where we may upload IMs of different projects
and interested lenders may get information about that. It
will save time, paper and cost. In Bangladesh usually it
takes a lot of time for fund raising and also in signing of
the documents after financial closure while in the international market signing of documents only takes a day. We
must find ways to reduce this time further.
In our country we do not have secondary loan market
because of lack of confidence of our lenders. We should
initiate the idea and try to popularize it from this platform.
Hosne Ara Shikha, Deputy General Manager,
Bangladesh Bank
Bangladesh Bank, as regulator, always appreciates syndication financing as it plays a vital role for industrialization
and reduces Banks' credit risks on a project.
Bangladesh Bank has been working with IPFF (Investment Promotion and Financing Facility) fund of World
Bank for development of infrastructural projects which is
mostly operated through syndication arrangement by the
Banks & FIs. IPFF is also helping to increase the capacity
of our local lenders.
PPP projects will create new opportunities for syndication market in Bangladesh. For infrastructure projects PPP
office will conduct feasibility studies and other necessary
documents of international standard. So, it will certainly
reduce burden on syndicate members to undertake such
financing.
Muhammad Hasnain Abid, Vice President, Islami
Bank Bangladesh Limited
Previously Islami Bank did not participate in loan
syndication because of our strong capital base and
liquidity. Our strong capital base supports large size
financing within the frame of single borrower exposure limit. Another important consideration is our
mode of banking which is based on Sharia. Due to
these differences, we used to abstain from participating in syndicated loan.
But now we are feeling the necessity of syndication for
risk mitigation. We have already started to participate in
financing new and large projects through Syndication. We
are also trying to adopt syndicated financing within our
sharia system
Khan Md. Shamim Aziz, Barrister, Shamim &
Associates
Our existing legal system is quite favorable for syndication financing. In the year 1990, we introduced Artha
Rin Adalat with only 7 articles and by now we have
more than 60 sections and subsections. A good law
structure helps to lessen litigation cases of complex
financing like syndication.
In Bangladesh, syndication default rate is much lower
and is very encouraging for legal intervention. We need to
reduce the existing time consuming process of signing
and preparing syndication documents and mortgage
formalities.