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Definition: Credit Sleeve
It is a type of credit agreement between lender and a company where the lender will provide working capital and collateral guarantees for the company. The lending party is known as “sleeve provider”. This kind of agreement is generally used when the company has a low credit score and is not able to use to traditional methods of debt financing to fund its requirements.
Traditional methods of debt financing are by selling corporate bonds, treasury bills and notes to institutional or individual investors. To understand how credit sleeve occurs let’s take an example of a market participant A which would like to enter into a transaction with another market participant B but they cannot find an agreement because of A’s low credit status. Hence they find a third participant C who will guarantee collateral for A so as to increase its credit status and is willing to sleeve the trade i.e. C buys and sells the same contract simultaneously for A. Two types of trade take place between A and C and B and C. In first trade C buys from B, C will report the trade as buyer and also as sleeve trade and B reports the trade as an initiator and seller. The second trade is between A and C in which A reports the trade as buyer and aggressor and C reports this trade as seller and as sleeve trader.
One of the real examples of credit sleeve agreement is between RRI Energy and Merrill Lynch in 2006 in which Merrill Lynch will provide guarantees and collateral to counterparties in existing and future deals. In return for providing credit sleeve agreement RRI Energy will pay Merrill Lynch a restructuring fee of 12.75 million $ and 0.40$ for each MWh of power that RRI Energy provides to its customers. The credit sleeve agreement was for 5 years with a termination option provided only for RRI Energy provided they make whole payment in first 2 years of the agreement term.