REVOLVING UNDERWRITING FACILITY vs COMMERCIAL PAPER

Introduction

Most economic units like a financial institution, government bodies or business organisation are faced with every problems of liquidity management. Money markets are primarily present to cater to the needs of short term working capital needs of these entities. The needs of working capital may range from a measure of short to medium term periods. For medium term capital needs, a Revolving Underwritten Facility is used and for short term needs a Commercial Paper is issued.

Revolving Underwritten Facility (RUF ) -  A brief insight

Revolving Underwritten facility is a credit facility in which a group of underwriting bankers extend a line of credit to a borrower who is unable to sell any of the Eurocurrency notes. It is similar in terms of an overdraft facility that is used by the bank’s retail and institutional clients. The loan is extended to the borrower as a credit, rather than buy back the Euro note it is unable to sell.

It is credible to note that , global banks which were faced with the same issues of growing competiveness of issuing short time credit , introduced RUF’s and its siblings in the form of NIF’s. These revolving credit facilities provided clients with the choice of arranging loans which at an spread of slightly greater than the LIBOR and also selling ECP’s through the bank’s dealing facilities. Though the system as a whole appeared to be a duplication of the ECP(Euro Commercial Paper – explained in detail below) programme, in which all the beneficial features of an ECP was retained while channelling the loan through the bank’s secure facilities. However beyond all criticism, the process as a whole flourished and competition increased among banks for extending these RUF’s for corporations.

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NIF’s can be best described with an example; say a issuing part agrees to an a consensus with an bank  for $500 million credit facility for a period ranging from 5 – 7 years. The lead bank manages the syndication of the loan with the other banks. Any amount of funds that are withdrawn for the whole sum can be repaid at any time intervals of time. The issuer then withdraws part of the loan at an agreed rate, say LIBOR (London Inter Bank Offered Rate) +1/4 %  or alternatively involves in the issue of Euro Commercial paper to ...

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