Module 5 - Bank Credit and Loan Documentation Flashcards
What is the role of commercial banks in society?
The traditional role of the commercial bank in society was to act as an intermediary between those with surplus funds (lenders) and those in need of funds (borrowers).
The role of the bank can be summarised as intermediation and risk management.
What is securitisation?
The conversion of illiquid assets into liquid assets that can easily be bought and sold on the financial markets.
Large numbers of illiquid assets are grouped together based on the cash flow they are expected to provide the bank. The rights to these payments are then sold to a third party.
Mortgage-backed securities (MBS) are an example of a securitised asset.
Securitisation has led to disintermediation.
What are committed facilities?
The lender is contractually obliged to make funds available during the term of the engagement. This is subject to the borrower complying with the terms of the agreement.
The agreement will stipulate the ‘events of default’ which trigger the ability for the bank to claim immediate repayment of its facility.
There is a cost in the form of a committment fee if the facility is not fully drawn down or if the draw-down is delayed beyond which the bank commited to make the funding avilable.
Committed facilities are more uncommon than uncommitted facilities but most firms consider it prudent to have some in place.
The 2 common types of commited facility are term loans and revolving credit facilities.
What are the key characteristics of a term loan?
Once drawn, the amount of the loan cannot
be increased again without a new loan agreement, even if some of the finance is
repaid.
Maturity - ranges from 1 year to more than 10 years. Can be drawn down at once or in tranches.
Repayment profiles - A single lump sum at maturity (bullet repayment) or in installments (amortising). May be small installments then a larger final installment (balloon). Installment payments reduces the banks risk and the interest rate correspondingly.
Interest rate - quoted as a percentage or in basis points (1/100 of a percent). Can be fixed or floating. May be set at SONIA for periods of 1, 3, or 6 months.
Margin - depends on the borrowers credit standing and the term of the loan. A ratchet may be agreed upon which will vary the margin depending on trading performance or other specified factors.
