What is a main bank?
A lead bank is a bank that oversees the arrangement of loan syndication. The lead bank receives additional remuneration for this service, which consists of recruiting union members and negotiating financing conditions. In the Eurobond market, the lead bank acts as agent for an investment syndicate.
A lead bank is also referred to as a primary underwriter.
Key points to remember
- A lead bank coordinates and supervises a syndicate for the underwriting of loans (bonds) or stocks for sale to investors.
- The lead bank generally receives a more generous amount of fees than the syndicated banks because of its coordinating role and responsibilities.
- Lead banks are essential in coordinating and marketing IPOs as well as large corporate debt deals.
Understanding the leading banks
A lead bank generally refers to an investment bank that manages the underwriting process for a security in conjunction with other banks, called syndicated banks. In this sense, the lead bank can also be called the lead manager or the managing underwriter. A more general meaning of this term is simply the primary bank of an organization that uses multiple banks for several different purposes.
The primary underwriting bank will generally work with other investment banks to establish a syndicate of underwriters and thereby create the initial sales force for a company’s securities. These bonds or shares will then be sold to institutional and individual clients. The lead bank will usually be the one that assesses the company’s finances and current market conditions to arrive at the initial value and quantity of shares to sell. These securities often carry a large sales commission (up to 6-8%) for the syndicate, with the majority of the shares held by the lead bank.
The role of the lead bank in loan syndication
In loan syndication, several banks will work together to provide a borrower with the necessary capital. Loan syndications are generally formed for the purpose of corporate borrowing, including for mergers, acquisitions, buyouts and other investment projects. Situations that require loan syndication will generally involve a borrower requiring significant capital that may be too large for a single lender and / or outside the scope of that lender’s risk exposure levels.
A lead bank, in this case, is often responsible for all aspects of the transaction, including the initial transaction, fees, compliance reporting, repayments over the life of the loan, loan monitoring, and aggregate reports for all lenders in the transaction. Major loan syndication banks can charge high fees due to the extensive reporting and coordination efforts required to complete and maintain loan processing. These fees can reach 10% of the loan capital.
Sometimes the lead bank may rely on a third party and / or additional specialists at various stages of the loan syndication or repayment process to facilitate reporting and monitoring.
The role of the lead bank in the subscription of securities
In an initial public offering (IPO) or other forms of issuance of securities, a lead bank may organize a group of underwriters, also known as an underwriting syndicate, for the transaction. As in the case of a loan syndicate, the purpose of an investment syndicate is often to spread risk and / or to merge funds into a large transaction.
Lead banks will assess an issuer’s financial data and current market conditions to arrive at an initial value and quantity of shares to sell. Newly issued shares can result in a large selling commission for an investment syndicate (sometimes close to 6% to 8%); however, the bulk of the shares will go to the lead bank.