A syndicate is usually formed when a borrower is selling bonds through the competitive market. In this case, one investment firm, known as the lead manager, creates a syndicate through a syndicate agreement letter. Each member of the syndicate commits to selling a certain percentage of the overall bond transaction should the syndicate win the bid.
Before the lead manager places a bid for the bonds, it consults with the other members of the syndicate on their market views and creates a consensus yield table per maturity, which is used when bidding on the bonds. If the syndicate wins the bid, the bonds are distributed to the syndicate for sale to the market.
Note that neither the lead manager nor any members of the syndicate have any communications with the borrower aside from sending the borrower their bid.
Example:
The state of Montana is preparing to issue a $100 million general obligation bond issuance in the competitive market.
A single bank could bid on the bonds themselves, but in order to reduce their exposure to winning with a too aggressive bid (e.g., yields set too low for the market to want to purchase the bonds), the bank could create a syndicate of seven banks, where each bank is liable for 1/7 of the risk exposure should they win the bid but are unable to sell the bonds in the marketplace, and thus must place the bonds in their own inventory.
Syndicates are created to: