Bank credit and loans

Here you can find a list of definitions for terms associated with bank credit & loans. These terms are listed alphabetically, alternatively you can use the find facility within your internet browser (by pressing control + F simultaneously) to search for terms within this page.

Acceleration Clause
When a lender has the right to demand the immediate repayment of all outstanding debt in the case of default under a loan agreement. This acceleration clause is included in most debt and derivative agreements.

Acid Test Ratio
A measurement of a company's liquidity i.e. its ability to meet its obligations with cash or by liquidating assets. The financial ratio is: current assets less inventories divided by current liabilities. See liquidity ratios.

Advance Payment Bond
See advance payment guarantee.

Advance Payment Guarantee
A written promise that a product/service will be provided in exchange for a payment made in advance of the actual purchase.

Agent
A person who acts on behalf of another party (a principal). In a syndicated loan, the agent is the bank which acts on behalf of all the lenders and is responsible for administering the loan and acting as a conduit for all payments. Usually called the facility agent.

Annual Equivalent Rate (AER)
The notional annual rate of interest applied to current, deposit and savings accounts assuming that all interest is reinvested or compounded.

Annual Percentage Rate (APR)
The nominal interest rate for one year.

Arranger
A bank or other financial institution responsible for originating, structuring and syndicating a transaction. The arranger always has a senior role, is often the agent and, if required, underwrites all or a part of the transaction as well as participating at the senior level.

Asset-backed Finance
Financing that involves the formal pledging by the borrower of assets to support the loan.

Asset Financing
A type of financing whereby a lender is given a charge over a specific asset or group of assets that are being financed by the underlying loan. The typical assets charged are those used to generate working cash as well as property and fixed assets.

Asset Sale
The sale of a loan by a bank to a third party. See loan sale, assignment of loan, novation, sub-participation and silent sub-participation.

Assignment of Loan
The transfer of ownership of a loan to a third party. See asset sale.

At Sight
A negotiable instrument that requires payment upon presentation of the instrument.

Available (Drawdown) Period
The time span after signing a loan in which the borrower can draw down funds from a lender.

Back-to-Back Letter of Credit
A letter of credit backed by another letter of credit with the same terms and conditions.

Back-to-Back Loan
A cross-currency agreement whereby one party lends funds in a given currency to the other party, which is usually situated in a different country, in exchange for a loan, for the same amount and maturity in another currency, from that party. Back-to-back loans are mainly used to minimise foreign exchange exposure, particularly when foreign exchange regulations prevent the use of a swap agreement. Back-to-back loans have now been largely replaced by long-term cross currency swaps.

Balloon Payment
The final repayment of principal on the maturity date of a loan when the final payment is larger than previous repayment instalments.

Bank Bills
Generic term for a discountable commercial bill issued or accepted by a bank. See banker's acceptance and trade bill.

Bank Cheque
See bank draft.

Bank Draft
A draft drawn by a bank on itself. The draft is purchased by the payor and sent to the payee, who presents it to their bank for payment. That bank presents it to the payor's bank for reimbursement. Also known as bank cheque, cashier's cheque, teller's cheque and treasurer's cheque.

Bank Guarantee
A guarantee issued by a bank. See guarantee.

Banker's Acceptance (BA)
A negotiable time draft drawn and accepted by a bank to pay the face amount to the holder at a specified time in the future. See draft.

Base Rate

1. An interest rate that is well known and widely quoted in the market and on which other rates of interest are based. Examples of base rates are the US Fed Funds Rate and Prime Rate, the Euro Interbank Offer Rate (EURIBOR) or the London InterBank Offered Rate (LIBOR).
2. Bank of England base rate, the benchmark rate for British banks.

Bid Bond
Bond that acts as a guarantee that the bidder will, at the bid price, enter into and comply with a contract. Also known as tender bond.

Bilateral Facility or Loan
A credit facility or loan granted by a bank to a customer. Bilateral facilities and loans differ from syndicated facilities and loans in that the loans are directly between the borrower and the bank.

Blank Endorsement
A signature (e.g. on the back of cheque) endorsing the execution of a transaction by the party in possession.

Break Costs
See prepayment penalties.

Call Money (Money on Call)
A loan or deposit which is automatically renewed on a daily basis until the lender or the borrower indicates that it no longer wishes to lend or borrow the funds.

Cash Flow Analysis
The analysis of an organisation's cash flow to determine its ability to meet its trading and credit obligations. It is from a company's cash flow that unsecured lenders look for repayment.

Certificate of Incorporation
Certificate issued by a government or public authority which permits a business to operate legally as a corporation within that country or territory.

Collateral
Asset(s) pledged as security for the repayment of a loan.

Commercial Banks
Financial institutions which maintain deposit accounts and provide bank loans to companies and individuals, in addition to offering other related services.

Commitment Fee
The fee payable on the unutilized amount of a committed facility. Commitment fees are usually calculated daily and paid quarterly.

Committed Credit Facility
An arrangement between a borrower and a lender, whereby the lender enters into an obligation to provide funds upon request by the borrower, provided the conditions precedent and any ongoing agreed conditions and covenants in the loan agreement have been and are being met. The borrower pays a commitment fee on the undrawn portion of the committed facility. Also known as a committed line of credit.

Committed Line of Credit
See committed credit facility.

Conditions Precedent
The matters which have to be dealt with before a borrower will be allowed to borrow under a facility or loan agreement. These will be listed in the agreement. Most of the conditions precedent will involve the preparation and submission of documents to the bank (or agent for a syndicated loan/facility) and will usually include copies of all the constitutional documents of the borrower, security documents (if any) and a board resolution and/or legal opinion addressed to the bank confirming the borrower's corporate existence and powers to borrow and enter into the facility or loan agreement.

Covenant
An agreement by the borrower to perform certain acts (such as the provision of financial information), to refrain from certain acts (such as charging it assets or incurring further indebtedness beyond an agreed limit) and to meet agreed financial covenants.

Credit Analysis
The analysis of a company's performance, financial standing and future prospects with the objective of determining whether it will be able to fulfil its present and proposed contractual obligations.

Credit Facility (or Line of Credit)
A short- or long-term borrowing arrangement provided by a bank which may be committed or uncommitted.

Credit Reference
A third-party rating of an individual's or company's creditworthiness.

Creditor
Individual or legal entity that is owed money by another individual or entity, following the granting of a loan or credit by the former to the latter.

Creditworthiness
An assessment of an individual's or company's credit standing repaying debt.

Cross-default Clause
A clause in a loan document or derivatives contract stipulating that a default under any other loan document or financial contract may result in the lender being able to accelerate the loan or financial contract. See acceleration.

Cross-guarantees
A series of guarantees issued by two or more parties in favour of the same person or entity in which the guarantor(s) guarantee(s) the obligations of the other guarantor(s) in the event that one of the other guarantor(s) are unable to meet their obligation(s) under their guarantee(s).

Current Assets
Cash and assets (including deposits, debtors and inventories) that can be turned into cash within at least 12 months.

Current Liabilities
Liabilities (including short-term loans and trade creditors) that are likely to be settled within a year.

Current Ratio
A financial ratio of current assets to current liabilities. See liquidity ratios.
Daylight Credit (or Daylight Overdraft, Daylight Exposure, Intra-day Credit)
An intra-day exposure of a bank when an account is in an overdraft position at any time during the business day. Conversely, for the account holder it is a credit extended for a period of less than one business day. Daylight credit may be extended by central banks to even out mismatches in the settlement of payments. In a credit transfer system with end-of-day final settlement, daylight credit is tacitly extended by a receiving institution if it accepts and acts on a payment order, even though it will not receive final funds until the end of the business day.

Debt Capacity
The amount that a company can theoretically borrow without endangering its long-term stability.

Debt-Equity Ratio
The ratio of debt to shareholder's funds. Debt can be variously defined and measured: A measurement of leverage in the USA.

Debt Management
The management of an organisation's liabilities so as to minimise the cost of borrowing for an agreed level of risk.

Debt Maturity
The due date for repayment of a loan.

Debt Maturity Profile
A schedule of the debt repayments due by a company over time.

Debt Service
The sum of the principal repayments and interest to be paid each year under a loan agreement.

Debt-Total Assets Ratio
The ratio of debt to total assets: A measure of gearing in the UK.

Debtor
Individual or legal entity that owes money to another individual or entity following the granting of a loan or credit by the latter to the former.

Downstream Guarantee
A guarantee usually issued by a parent company guaranteeing the obligations of its subsidiary.

Downstream Loan
A loan from a parent company to its subsidiary.

Draft
A written order given by the issuing party (the drawer) to another (the drawee) to pay a party identified on the order (payee) or the bearer a specified sum, either on demand (sight draft) or on a specified date (time draft). See bank draft, bill of exchange, cheque and bankers acceptance.

Drawee
The party required to pay the amount owed on a cheque/draft.

Drawer
The party which issues the cheque/draft and is subsequently payed by the drawee.

EBIT
Earnings before interest and tax.

EBITDA
Earnings before interest, tax, depreciation and amortization.

Event of Default
One of a list of events, the happening of which entitles the lender(s), under the terms of the relevant credit facility or debt instrument, to cancel the facility and/or declare all amounts owing by the debtor(s) to be immediately due and payable. Events of default typically include non-payment of amounts owing to the lenders, breach of covenant, cross-default, insolvency and material adverse change.

Evergreen Credit or Facility
A revolving credit facility without a fixed maturity date where the borrower can request an extension to the repayment date.

Facility Letter
A written agreement given by a bank to a customer setting out the terms and conditions under which it will provide certain credit facilities including overdraft arrangements.

Factoring
A method of funding from the sale or transfer (with or without recourse) of a company's accounts receivable to a third party (a factor). See non-recourse and recourse factoring.

Financial Covenant
An agreement by a borrower to meet certain defined financial performance measures such as financial ratios or minimum net worth.

Financial Ratios
A quantitative measure deduced by dividing one item of financial information by another, the purpose of which is to simplify the interpretation of financial information, examples being interest coverage ratios or gearing ratios.

Fixed Charge (UK)
A registered lien on specific assets.

Fixed Interest
Interest on loans that remains at a fixed rate for the entire life of the contracted debt.

Floating Charge (UK)
A general lien on a company's assets that can be realised by the beneficiary of the floating charge in accordance with its terms. At the point of realisation, it crystallises into a fixed charge.

Floating Interest Rate
An interest rate on loans (including debt securities) that is modified regularly on the basis of an index which varies frequently according to market developments and conditions e.g. LIBOR and EURIBOR.

Floating Rate Loans
Loans that have periodically changing interest rates.

Forfaiting
The purchase, at a discount and on a without recourse basis, of medium-term negotiable instruments by third parties that are not involved in the original transaction.

Front-end Fees
Fees paid to the lender or lenders in a syndicate at the beginning of a financial arrangement such as a loan or credit facility.

Gearing (UK)
See debt-total assets ratio.

Guarantee
A statutory or contractual obligation by a parent company or some other person or entity to make interest, principal or premium (if any) payments if the principal debtor defaults on such payments.

Interest Coverage Ratio
The ratio of EBIT:annual interest expenses. The ratio indicates the borrower's ability to meet its interest payments.

Interest Rate
The cost of borrowing or gain from lending money expressed as a percentage per annum.

Invoice Discounting
A method of funding for a company when it sells outstanding invoices to a finance house unbeknown to the debtor.

Letter of Awareness
Letter provided by a subsidiary's parent company acknowledging that the parent is aware of the subsidiary's obligation.

Letter of Comfort (Comfort Letter)
A letter provided by a parent company to a lender confirming its awareness and approval of the lender providing credit facilities to one of its subsidiaries. These letters are not often legally binding.

Letter of Credit (L/C)
A promissory document issued by a bank to a third party to make a payment on behalf of a customer in accordance with specified conditions. Letters of credit are frequently used in international trade to provide a secure way for an exporter to receive payment from an importer via the importer's bank. L/Cs can also be issued by companies, but this is rare.

Leverage (USA)
A ratio reflecting the extent to which debt is used instead of equity in the capital structure of a company. See debt-equity ratio.

Line of Credit
See credit facility.

Liquidity Ratios
See acid test, current ratio and quick ratio.

Loan Agreement
A written contract in which the terms and conditions of a loan are agreed on by both lender and borrower. The loan agreement will, amongst other things, contain representations and warranties as well as positive and negative covenants by the borrower. In addition, there will be details as to how the loan will operate, such as how draw-downs will be made.

Loan Guarantee
A guarantee to repay a loan.

Loan Sale
See asset sale, assignment of loan, novation, sub-participation and silent sub-participation.

Long-term Finance
Financing with maturities of over ten years.

Long-term Liabilities
Obligations which are due beyond one year or a normal accounting cycle. See current liabilities.

Margin
The additional interest element payable over and above the benchmark reference rate to reflect credit risk, eg. the number of basis points over LIBOR or over a government bond or gilt.

Margin Loan
A loan given by a broker to a customer that is secured by securities given as collateral by the client.

Material Adverse Change (MAC) Clause
A general event of default designed to cover up any change in circumstances which might affect the likelihood of a borrower repaying its debts or performing under its covenants. The clause is couched in general language and is used to supplement more specific events, such as the cross-default clause.

Maturity
The period of time a debt is owed before it or the final tranche has to be repaid.

Medium-term Finance
Financing with maturities of between one and ten years.

Mezzanine Financing
Debt finance which is subordinated and ranks between senior bank debt and equity. It is often fixed rated sometimes with an additional equity-related reward.

Mortgage
A charge given over an asset such as real estate, an aircraft or a ship to secure a loan, often used to finance the purchase of that particular asset.

Negative Pledge
A covenant whereby a borrower undertakes not to allow the creation or subsistence of secured debt or, if the borrower has the right to issue secured debt in the future, not to secure such new debt without offering the same security equally (i.e. pari passu). Negative pledges are normally subject to numerous exceptions.

Net Worth
A company's share capital and reserves or the company's total assets less all its liabilities.

Non-recourse Factoring
The sale or transfer of title of a company's accounts receivable to a third party (factor) where the latter is not permitted to request repayment from the seller if the debtor fails to meet their payment obligation.

Note Issuance Facility (NIF)
A service offered by a banking syndicate where a borrower has security of obtaining the funds sought via an issue of short-term debt securities. In the event short-term debt securities are not taken up immediately, the syndicate guarantees that it will fund the issuer's and resell them at their own risk to investors. NIFs are rarely used.

Novation
The transfer of rights and obligations from one contracting party (which is released of those obligations) to a third party with the agreement of all the contracting parties. See asset sale.

Off-balance Sheet Financing
A method of financing assets so that, for accounting purposes, the assets do not appear on the balance sheet of the company using the assets.

Overdraft (UK)
When credit is extended to a borrower and is repayable on demand.

Overnight Money (or Day-to-Day Money)
A loan with a maturity of one business day.

Pari Passu
A legal term that is used when different series of debt (whether intermediated or disintermediated) have equal ranking in terms of repayments rights.

Prepayment
Repayment of the principal amount of a debt, or a portion thereof, by the borrower prior to its repayment/maturity date.

Prepayment Penalties
The costs incurred when prepaying a debt before the date specified in a loan or credit agreement, when cost-free prepayments are not allowed. Sometimes referred to as break costs.

Prepayment Provision
A provision specifying how and when the borrower is able to repay the principal amount of a debt prior to its maturity date.

Principal Risk
The risk that the borrower will not be able to repay some or all of the principal of an outstanding loan or credit facility.

Promissory Note
A written promise by a borrower to repay a loan in accordance with the specific details of a contract.

Quick Ratio
See acid test ratio.

Recourse Factoring
The sale or transfer of title of the accounts receivable to a third party (factor) where the latter can request repayment from the seller if the debtor fail to meet their payment obligation.

Repayment Date
The date on which a loan is required to be repaid, in accordance with an agreement.

Representations and Warranties
A series of statements of law and/or fact made by the borrower in a credit facility agreement on the basis of which the banks agree to enter into the facility. The representations will typically cover such matters as the legality and enforceability of the documentation, the financial condition of the borrower and the absence of any material litigation or other proceedings against the borrower. Material inaccuracies in the representations will normally constitute an event of default.

Revolving Credit Facility
A borrowing arrangement that provides the borrower with a degree of flexibility by allowing the borrower to draw and repay different amounts for different periods throughout the life of the credit facility. There is no requirement for a revolver to be fully drawn.

Rollover

1. The extension of the maturity of a debt obligation. This usually occurs under a revolving credit facility where a drawing is re-drawn or, under a term loan, when the interest rate is reset for a further period of time.
2. The modification of the interest rate applied in a swap agreement.
3. The reissue/reinvestment of deposits on their maturity date.

Secured Debt/Loan
Debt that is secured by specific assets of the borrower. In the event of a borrower's default, holders of secured debt have the first right of repayment from the proceeds of the secured assets ahead of holders of unsecured debt. See fixed charge and floating charge.

Senior Debt
Unsecured debt which ranks ahead of other (subordinated) loans for repayment, but after loans which are secured.

Short-term Finance
Bank financing with maturities of up to one year.

Sight Draft
A draft required to be paid upon presentation.

Silent Sub-participation
A sub-participation where the borrower is neither consulted nor informed. See asset sale.

Standby Facility
A line of credit supplied by a bank which is not expected to be drawn apart from in exceptional circumstances.

Standby Letter Of Credit (SBL/C)
A letter of credit issued to ensure the financial performance of a bank's customer to a third-party beneficiary and which is only drawn upon in the event of non-performance.

Subordinated Debt
Unsecured debt which ranks below other lenders for repayment.

Sub-participation
The silent or acknowledged sale of an asset where the sub-participant agrees to fund the loan and assume the credit risk, but does not obtain any rights and obligations against the borrower. See asset sale.

Swingline
A standby, usually committed, bank credit facility to maintain corporate liquidity in the event of market disruptions. The line can be used to cover commercial paper rollovers and is sometimes referred to as a commercial paper back-up facility.

Syndicated Loan
A loan given by two or more financial institutions (the syndicate) to a company, consortium of companies, government or supranational authority. Syndicated loans have common documentation.

Tangible Net Worth
A company's total assets after the subtraction of intangible non-physical assets such as copyrights, goodwill, patents and all its liabilities.

Tender Bonds
See bid bonds.

Term Loan
A loan with a fixed term (usually ranging between one to ten years) and often with fixed periodic repayments, which is typically used to support capital investments. Term loans usually need to be drawn in full during the drawdown period, and any undrawn portion is cancelled.

Time Draft
See draft.

Transferable Credit
Funds available via a letter of credit which can be transferred from one beneficiary to another.

Transferable Loan Facility
A loan agreement that allows the lender the possibility to transfer or assign the loan to another party.

Uncommitted Line of Credit
A credit line that carries no obligation for the bank to provide funds at the borrowers request and that can be cancelled without notification.

Unsecured Debt/Loan
Debt that is not secured or supported by the borrower's assets.

Upstream Guarantee
Guarantee issued by a company, usually an operating subsidiary, to support its parent company's obligations.

Upstream Loan
Loan provided by a subsidiary to its parent company.

Variable Rate
An interest rate that changes periodically in line with market rates.

Waiver
Agreement by a lender to change a term or condition of a loan/credit agreement in the borrower's favour.

Back