Posted in Finance, Accounting and Economics Terms, Total Reads: 312
It is the loan given in a currency that is different from the national currency of the bank that gives loans. The loan is given in a currency that is different from the domestic currency of the financial institution that gives this loan.
A Euro credit loan can be given to an Australian company let’s say 10 million in Australian dollars by an American based bank (USD). It doesn’t necessarily have be denominated in Euro. It’s used to emphasize that these deposits are not under the preview of the central bank. This helps for capital flows between countries and helps increase liquidity of both currency and adjusts forex market risk. This also helps to finance the domestic investments and investments abroad. In the above example the American bank can benefit from the dollars which they gets from incoming payments which are usually large amount and for a long period of time. Funding is provided by the banks in the Eurocredit market.
Euro credit loans are usually given to large corporates of governments who request them. The financial institutions or banks that comprise this market are the same as the Eurocurrency market except that the euro credit loans are long term loans. When banks hold deposits in currency that is different from the domestic currency of the banks it’s called a Eurocurrency market.
The interest rate charged for these loans are based on LIBOR (London Interbank Offered rate), based on the variances in the LIBOR the rates are retuned every six months. The issuing banks form a syndicate because these loans are usually large loans, this helps minimize the risk. For the syndicate banks the risk is lowered in case the borrower defaults.
E.g. Through a syndicated Euro credit a company from Australia borrows $400 million USD for 5 years at an interest rate of 3% over LIBOR. The rate of interest is floating rate which is retuned every six months. For the first six months it becomes 6% and 4% for the next six months. For the first six months in this case the loans becomes 9% and 7% for the next six months. The Australian company pays 18 million dollars USD in the first six months and 14 million dollars in the next six months. Each bank in the syndicate only bears a portion of the loss in case the company defaults. Usually there is a loan processing fee which can be 2% of the amount. The Australian company pays 8 million USD in the beginning and would receive only $392 USD as loan amount.