Credit Agreement Terms

From Open Risk Manual

Definition

Credit Agreement Terms. Terms relating to an agreement to extend some committed credit facility on the part of a potential lender to a potential borrower.


Issues and Challenges

Includes terms for construction loans and other agreements which, while labeled as loans, are agreements to make loan advances at certain times and under certain conditions in the future. ACTIONS: Still need to connect these terms together in the overall model for Construction Loans and the rest. For now, added this term to take care of detail terms sets that are otherwise orphans. 14 July: What form does the set of terms of the commitment take? - will define a set of parameters or limits under which you are prepared to lend money. These may include: Pledges, negative pledges; pledge of security that is available to you if you lend the loan/ also restrictions on how frequently the tranche can be drawn down whether or under what conditions you can re-draw. These terms will determine the nature of the loan. so for example a student loan will have quite a restrictive facility. The facility probably on't just pay you money, it may for instance pay against a receipt for the fees, or may pay the institution directly. These terms are designed to control the credit risk that the lender (or ultimate lender) is going to take. Also you are charged for providing that facility - the bank, once it's made that commitment, will have had to set aside capital. They have no control of when you are going to draw down on that loan, so the bank has to ensure that when you do they don't exceed their capital requirements. There is a fee to cover this. Syndicated lending is more complex - there would be multiple lenders when the draw-down takes place - the potential lenders are numerous, and will be beyond the credit limits of any individual bank. these have agents, managers and so on, as well as the syndicate members who participate in the lending. Manager: does all the organization. calls people (lenders) together when the borrower makes a draw down, and distributes this. See Syndicate Loan diagram. This can be turned into multiple actual loans. There would be separate limits in these, based on currency, risk type and so on (as per Credit Facility generally). So one might use the borrowing for trade finance, revolving credit facility, straight draw-down, all specified in terms of the limits (maximum amounts that the lenders are prepared to give). A facility may also be a stand-by facility - one you may never want to draw down but need as protection.

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