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INTERNATIONAL BANK LENDING as their name would imply, commercial banks have traditionally provided short term commercial loans as their main stable. US banks establishing their banking facilities in London, term loans were their main competitive tools. When oil Prices crippled, a world wide balance of payments imbalance was created requiring the transfer of funds from oil exporting countries to oil importing countries.
Commercial banks assumed the role of recycling so-called petro-dollars. This led to the commercial banks to engage in balance of payments deficit financing and development project financing. With heightened debt crisis, commercial banks retreated from less developed country lending to merger-cum-acquisition financing. Banks have long been involved in individual project financing, traced back to banks or loans financing independent oil company projects.
Types of international bank lending:
Development loans: Developing countries borrow from abroad for current consumption as well as for investment purposes. Depending on the stages of economic development, developing countries usually receive external funds from different sources with different degrees of grant element to balance
of payments position of a country. It is a typical source of funding at different stages of development. A country in early stages of development would not have to access to commercial credit markets because of its poor credit standing. Thus a country depends primarily on bilateral foreign aid with heavy grant element. When a country moves higher stages of development, the grant element changes from outright gift to soft loans to hard loans. Soft loans are those with highly concessionary interest rates and maturity and are even repayable in local currency. Compared with commercial loans, official hard loans still provide more favorable terms for borrowers as they contain some grant element. Developing loans are provided to finance infrastructure construction, such as highways, telecommunications facilities, utility facilities, water and sewage systems, schools and hospitals. When a commercial bank participates in development financing, they usually provide bridge loans which are repaid as soon as permanent financing arranged. In order to preserve their limited financial resources, these development banks encourage commercial banks participating in co-financing under which banks provide short-term construction-type loans, medium term loans and these development banks provide for permanent replacement or loans.
Project financing: Project financing is provided for a specific project. It is usually initiated by sponsors who are interested in the project because of it performs functions complementary to their activities, such as the supply or raw materials, online solutions and services or transportation services. Some Project is jointly sponsored by several sponsors each taking up a minority interest. For pooling their resources together, sponsors may be able to undertake a needed project otherwise not possible because of its sheer size. Minority interest in the form of partnership or trust can also avoid double taxation which otherwise may be imposed at two levels, project and sponsor level.
A typical approach to the structuring of project financing is for the sponsors to establish a vehicle company and let it assume legal liabilities. Thus financing is provided to the project. Sponsors can minimize the adverse impacts of financing or loans on their balance sheet and limit recourse to them.
Project financing usually provides three layers of protection for lenders.
* Future stream of income generated from the project is sufficient for debt service. * The asset value of the project is sufficient to cover the loan value in the event of liquidation. * Further assurance is provided to lenders by third parties (Sponsors).
To arrange a suitable repayment guarantee to satisfy lenders and at the same time not to impact the balance sheets of sponsors adversely is indeed a matter of so-called financial engineering.
Sponsors provide repayment guarantee in the form of a long-term purchase commitment to services or products produced by the sponsored project, such as 1) through-put agreements 2) take-or-pay contracts 3) hell-or-high-leasing. Public sector project financing has gained in popularity. It takes the form of built, operate and transfer (BOT). In project financing, international banks perform the financial advisers role as well as lenders role.
Leveraged buyoyut loans: A Leveraged buyout is an acquisition of a firm that is financed principally, sometimes more than 90 percent, by borrowing on the basis of the assets of the firm to be acquired. The financing approach is similar to that of project financing. Lenders look to the assets to of the acquired firm as collateral and the net cash flows as source of debt service. There are four components of financing for a leveraged buyout, namely senior debt, subordinated debt, preferred equity, and common equity. Commercial banks are major providers of senior debt financing which is often used as an asset or loans sale bridge facility with medium-term maturity. Senior debt constitutes about 50 percent or more of total financing. Subordinated debt instruments, after rated as junk bonds are sold to institutional investors. Other Articles |
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