Loans banks
As an alternative to the issuance of securities, a corporation can raise funds by borrowing from a bank. There are five sourcing alternatives for a corporation:
1. A domestic bank in the corporations home country
2. A subsidiary of a foreign bank that is established in the corporations home country
3. A foreign bank domiciled in a country where the corporation does business
4. A subsidiary of a domestic bank that has been established in a country where the corporation does business
5. An offshore or Euro bank
Loans made by offshore banks are referred to as Eurocurrency Loans.
Syndicated Credit:
A syndicated bank Loans is one in which a group (or syndicate) of banks provide funds to the borrower. The need for a group of banks arises because the amount sought by a borrower may be too large for any one bank to be exposed to the credit risk of that borrower. Therefore, the syndicated bank loan market is used by borrowers who seek to raise a large amount of funds in the loan market rather than through the issuance of securities.
These bank loans are called senior bank loans because they have a priority position over subordinated lenders (bondholders) with respect to repayment of interest and principal. The interest rate on a syndicated bank loan is a rate that floats, which means that the loan rate is based on some reference rate. The loan rate is periodically reset at the reference rate plus a spread. The reference rate is typically the London Interbank Offer Rate (LIBOR), although it could be the prime rate (that is, the rate that a bank charges its most creditworthy customers) or the rate on certificates of deposits. The term of the loan is fixed. A syndicated loan is typically structured so that it is amortized according to a predetermined schedule, and repayment of principal begins after a specified number of years (typically not longer than five or six years). Structures in which no repayment of the principal is made until the maturity date can be arranged. Such loan structures are referred to as Bullet Loans.
A Euro syndicated loan is usually a floating rate loan with fixed maturity, a fixed draw down period, and a specified repayment schedule. One, two or even three banks may act as lead managers and distribute the loan among themselves and other participating banks. One of the leading banks act as the agent and governs the loan after execution; disbursing funds to the borrower; collecting interest payments; and collecting principal repayments from leading banks and so on. A Euro credit would have maturity between five and ten years; amortization in semiannual installments; and interest rate reset after every three or six months with reference to LIBOR.
When the lenders and the borrower dont wish to publicize the deal, a standard practice is dispensed with and a credit is arranged on a private basis between the group of lending banks and the borrower. These are known as Club Loans.
Revolving credits allow greater flexibility in the draw down and repayment schedules. This allows the borrower to redraw the loan or a portion thereof and to repay the drawing amount.
In a standby facility, the borrower is not required to drawdown the loan during a fixed, pre-specified period. He is only required to pay a contingency fee till the time the interest begins to accrue.
Syndicated credits can be structured in a way that they include various options. As in the case of FRNs, a drop-lock feature converts the floating rate loan if the benchmark index hits a specified floor. A multi-currency option allows the borrower to change the currency on a rollover date. In developing countries like India, security in the form of government guarantee, bank guarantee or mortgage on assets is mandatory for borrowers.
A syndicated loan is arranged by either a bank or a securities house. The arranger then lines up the syndicate. In the syndicate each bank provides the funds for which it has committed. The banks in the syndicate have the right to sell their parts of the loan subsequently to other banks.
Syndicated Loans are distributed by two methods: assignment or participation. Each method has its relative advantages and disadvantages, with the method of assignment the more desirable of the two.
The holder of a loan who is interested in selling a portion can do so by passing the interest in the loan by the method of assignment. In this procedure, the seller transfers all rights completely to the holder of the assignment, now called the assignee. The assignee is said to have privacy of contract with the borrower. Because of the clear path between the borrower and the assignee, assignment is the more desirable choice of transfer and ownership.
The participation involves a holder of a loan participating out a portion of the holding in that particular loan. The holder of the participation does not become a party to the loan agreement, and has a relationship not with the borrower but with the seller of the participation. Unlike an assignment, participation does not confer privacy of contract on the holder of the participation, although the holder of the participation has the right to vote on certain legal matters concerning amendments to the loan agreement. These matters include changes regarding maturity, interest rate, and issues concerning the loan collateral. Because syndicated loans can be sold in this manner, they have become marketable.
In response to the large amount of bank loans issued in the 1980s and their strong credit protection, some commercial banks and securities houses have shown a willingness to commit capital and resources to facilitate trading as broker-dealers. Further development of the senior bank loan market will no doubt eventually erode the once important distinction between a security and a loan: A security has long been seen as a marketable financial asset, while a loan has not been marketable. Interestingly, the trading of these Loans is not limited to performing loans, which are loans whose borrowers are fulfilling contractual commitments. There is also a market in the trading of non-performing loans loans in which the borrowers have defaulted.
Syndicated credits can be arranged in Euro markets and some other national capital markets. These are the so-called foreign loans. In the Japanese market, yen finance can be raised via bank Loans. Syndication and documentation are less expensive than bond issues and MOF criteria are less demanding. Syndicated Euro-dem loans can be arranged from German banks, though this form of financing is not very common. In the Swiss market, these are very rare and the SNB does not favor the case of CHF for Euro CHF credits.
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