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QUESTION ONE

Syndication is the process by which one lender transfers, usually by novation, all or part of its commitment under the syndicated facility to another lender or lenders. This reduces the original lender's exposure and its reward. Together, the facility lenders are known as the syndicate. A syndicated facility is a loan or other credit facility provided by more than one lender to a borrower or associated borrowers under the terms and conditions of one facility agreement. The expression syndicated loan is often used interchangeably with syndicated facility even when the syndicated facility comprises loan and other facilities such as a letter of credit facility. An agent bank is usually appointed to liaise with the borrower on behalf of the syndicate and to receive and distribute payments amongst the parties. Investment bankers typically provide one or more of the following services for the entity issuing new securities: Advice on the timing, issue price, volume of securities offered, and other terms, Purchase all or some of the securities from the issuer, and Resell the securities to the public. The latter two activities, called underwriting, generate fees for the investment bank. However, underwriting may involve substantial risks, especially the risk that the investment bank underwriting the securities may not be able to resell the securities at a profit. In cases where the investment bank must sell the securities at a price below what it paid to purchase them from the issuer, the investment bank will suffer a loss of its own capital. Since there is considerable uncertainty about the success or failure of new securities offerings, investment banks typically share the potential risks and rewards by forming a syndicate of investment banks. The number of firms included in the syndicate may vary widely, depending on the size and the risks associated with the securities. Establishment of a syndicate thus limits the risk to any single investment bank from any single new issue by spreading the risk across a number of investment banks

i) Outline and explain, in detail, at least two benefits and two risks association with the syndication process to both borrowers and lenders in an economy of nations such as Zambia. (20 Marks)

j) In your view, why would small scale maize traders use the syndication process to leverage their business transactions in Zambia? (5 Marks) (Total=25 marks)

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