Capital Syndication Procedure
A Capital Syndication is where a corporation, either directly or through a syndication group (investment bank) offers equity for sale to a group of professional or institutional equity investors on a private placement basis.
In order to start the process, the client corporation must create a corporate structure that allows for a specific class of equity to be sold. This is something that is usually handled by the corporation’s retained advisors. In creating the class of equity, it will usually be based on Preference Shares, and the client corporation may be expected to subscribe some of that equity, and assign that equity to their syndication group as payment for the service they provide.
Additionally, there will be a cost of syndication (sometimes known as a placement). These costs centre around the legal work required to keep the syndication within the bounds of financial services regulation. Typically, there will be the preparation of an offering memorandum, preparation of legal agreements between the corporation and investors as well as the appointment of specialist services such as registrar and paying agents. Typically these costs are built into the syndication and taken at the end of the syndication process.
The actual amount of costs will also be dependent upon whether the client corporation has retained their own legal and/or fiscal advisors to prepare the various documents required. If the capital syndication group is asked to prepare everything, the ultimate costs will usually be in the range of €120,000 – €250,000.
In order to start a capital syndication procedure, all that is usually needed is the client corporation’s agreement of the syndicator’s provisional offer, which contains the primary terms under which syndication can take place. If those principal terms are acceptable, the syndication group will advise of how much of the equity being offered will be subscribed by the client corporation (usually about 20%) This initial subscription is important for a number of reasons. Firstly, it means the syndication partners can be assured that at least 20% of the placement has been subscribed, and it assures the syndication group that it will receive adequate compensation for its efforts over the term of the underlying investment.
The level of equity participation will usually dictate the level of Refundable Retainer deposit that will be required to be placed into escrow. The purpose of the deposit is to assure the syndication group that in the event that the client corporation doesn’t proceed to final syndication, then the syndication group will have some degree of offset for its significant legal costs. However, under normal circumstances, the deposit is applied to the purchase of the agreed equity participation, so the deposit becomes part of the underlying investment pool. The level of deposit requirement is usually set at circa 1% of the agreed client