Definition of The Secondary Market

We have already pointed out that most Eurobonds are registered with a stock exchange during the issuing procedure, most trading is done over the counter.

Syndicated Eurocredits

A Eurocurrency is any freely convertible currency, such as a dollar or a yen, deposited in a bank outside its country of origin. It is a major source of international liquidity and figures prominently in determining exchange rates and financing balance of payments disequilibrium. The retail side of the Eurocurrency market is also important. It is one of the major sources of large-scale financing for a wide range of countries, institutions and firms. Because of the increasing tendency of banks to securitize their riskiest assets, it is also a source of many bonds that are traded on the international bond market.

Eurocurrency credit facility is that it can be mobilized quickly and easily. The documentation is standardized and simple and there is no waiting list to respect as there is in the Eurohond market.

Characteristics of Syndicated Eurocredits

The Lead Manager

Syndication refers to a number of banks grouping together to make a loan to one borrower. It is usually because of the size of the loans involved. The number of banks participating in a syndication can go as high as 100 or more but there is a precise hierarchy within the syndicate corresponding to each bank’s responsibilities. The lead manager has the most important role in organizing the loan from beginning to end and is always a large, internationally recognized bank. The lead manager is responsible for negotiating the overall conditions of the loan concerning rates, maturities, guarantees, etc. with the borrower. It is also responsible for organizing the syndicate by finding the other banks that want to participate. Sometimes a syndicate will include two or more lead managers.

Organizing the Loan

As the head of the syndicate, the lead manager is responsible for drawing up the placing memorandum that is then sent out by telex to certain banks that might be interested in participating is under-writing the loan. The placing memorandum is a confidential document that contains all the relevant information about the borrower and the placement. Generally, banks that are contacted for participation are regular partners of the lead manager. Experience has shown, in fact, that syndicates tend to remain stable over time and there is a strong tradition of reciprocity among members.

Different Types of Credits

There are two basic categories of Eurocurrency credit facilities: term loans and revolving credit facilities. A term loan can be divided into three stages: the drawdown period, the grace period and the redemption period. During the drawdown period, which usually lasts about 24 months, the borrower can increase the amount of his loan. The increases can be by simple advance notification or they can be scheduled contractually. The grace period comes after the drawdown period. During this time, the amount of the loan does not change and the only cash flows are those related to interest and commissions. The redemption period refers to the period when the loan is paid off. It can be paid off in one single installment, called a bullet repayment, or in several installments, called staged repayments. As already mentioned, most Eurocurrency loans give the borrower the right to prepay the loan with no penalty.

A revolving credit facility is a loan that permits the borrower to drawdown and repay at its discretion for a specified period of time. This increased flexibility has a cost paid in the form of a commission, called the commitment fee. The commitment fee is paid on the unused portion of a facility. A revolving credit is especially useful for borrowers with access to the other segments of the international financial markets who might need a bridging loan to tide them over between the end of one issue and the beginning of another.

Term loans and revolving credit facilities are only the generic types of syndicated Eurocredits. Multi-currency loans give the borrower the possibility of drawing the loan in several different currencies. This is especially useful for managing exchange rate risk. Maturities are also flexible. Most Euroloans are medium term, lasting from four to eight years, but it is not surprising to find maturities of up to 20 years.