QUESTION TWO The Lusaka City Council (LCC) intends to build a new market on a newly acquired piece of land along the great east road. It intends to use the project finance model to realize this project and has therefore set-up a special purpose vehicle (SPV) called LCC (2014) Limited. LCC will hold 60% of the equity while the other 40% will be shared equally between Njenge Construction Limited and Mbazo Consulting Limited. The total cost of this project is two million United States dollars. The shareholders will provide five hundred thousand dollars while the balance will be raised from the Zambian syndicated loan markets. The idea to raise funds from via a syndicated loan was made by the consultants who were engaged to advise on the best way of financing the project. The shareholders and project team have limited knowledge on what loan syndication entails. Required: a) Explain what loan syndication is and what the process involves. (5 Marks) b) Different banks play different roles in the syndication process. Discuss the roles banks play in the loan syndication process. (5 Marks) c) The project company in the process of arranging finance through syndication will engage an investment banker(s) to be the arranger. Explain the two ways in which investment bankers can bid for the role of lead arranger and in what circumstances each of the ways would be suitable. (5 Marks) d) Explain the forms of compensation typically available to banks who participate in a syndicate. (5 Marks) e) Lead arrangers typically invite a number of banks to participate in the syndicate by way of booking the transaction on their balance sheets. However, in practice not all banks take up the invitation to participate. Discuss some of the reasons banks cite for their non-participation in a project finance deal. (5 Marks) [TOTAL: 25 MARKS] QUESTION TWO The Lusaka City Council (LCC) intends to build a new market on a newly acquired piece of land along the great east road. It intends to use the project finance model to realize this project and has therefore set-up a special purpose vehicle (SPV) called LCC (2014) Limited. LCC will hold 60% of the equity while the other 40% will be shared equally between Njenge Construction Limited and Mbazo Consulting Limited. The total cost of this project is two million United States dollars. The shareholders will provide five hundred thousand dollars while the balance will be raised from the Zambian syndicated loan markets. The idea to raise funds from via a syndicated loan was made by the consultants who were engaged to advise on the best way of financing the project. The shareholders and project team have limited knowledge on what loan syndication entails. Required: a) Explain what loan syndication is and what the process involves. (5 Marks) b) Different banks play different roles in the syndication process. Discuss the roles banks play in the loan syndication process. (5 Marks) c) The project company in the process of arranging finance through syndication will engage an investment banker(s) to be the arranger. Explain the two ways in which investment bankers can bid for the role of lead arranger and in what circumstances each of the ways would be suitable. (5 Marks) d) Explain the forms of compensation typically available to banks who participate in a syndicate. (5 Marks) e) Lead arrangers typically invite a number of banks to participate in the syndicate by way of booking the transaction on their balance sheets. However, in practice not all banks take up the invitation to participate. Discuss some of the reasons banks cite for their non-participation in a project finance deal. (5 Marks) [TOTAL: 25 MARKS]
