Report on Universal Banking, Parallel Loan and Syndicated loan

Submitted by: Itulung Kauring

Rahul Shah

Raman Kaim

Saadhika Chawla

Report OnUniversal Banking

Parallel LoanSyndicated Loan

[International Trade and FInance]

Submitted for the partial completion of Bachelor in Management Studies

Shaheed Sukhdev College of Business Studies

University of Delhi

Submitted by: Itulung Kauring

Rahul Shah

Raman Kaim

Saadhika Chawla

Table of Contents

Introduction to Universal Banking.................................................................................1

Universal Banking in India.............................................................................................3

Products and Services offered by Universal Banks........................................................4

Universal banking coupled with SWOT..........................................................................7

Issues and challenges in Universal Banking.................................................................11

Conclusion...................................................................................................................13

Parallel Loan................................................................................................................14

Need for parallel loan...............................................................................................14

Benefits....................................................................................................................14

Drawbacks................................................................................................................15

Syndicated Loan...........................................................................................................16

History......................................................................................................................19

Types of Syndicated Loan.........................................................................................21

Credit facilities..........................................................................................................21

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Introduction to Universal Banking

The banking scenario in India has been changing at fast pace from being just the borrowers and lenders traditionally, the focus has shifted to more differentiated and customized product/service provider from regulation to liberalization in the year 1991, from planned economy to market.

The Indian banking has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending).

The competition heated up with the entry of private and foreign banks deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.

The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.

The term 'Universal Banking' in general refers to the combination of commercial banking and investment banking. The concept of universal banking is spreading fast among various types of banks.

It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial Services' through a single window. As per the World

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Bank," in Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms (including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters."

In a nutshell, a Universal Banking is a superstore for financial products, under one roof. Corporates can get loans and avail of other handy services, while individuals can bank and borrow. It includes not only services related to savings and loans but also investment. However in practice the term 'Universal Banking' refers to those banks that offer wide range of financial services beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Insurance, Credit Cards, Retail loans, Housing Finance, Auto Loans, etc.

However, Universal Banking does not mean that every institution conducts every type of business with every type of customer. In the spectrum of banking, specialized banking is on the one end and the Universal Banking on the other.

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Universal Banking in India

In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectorial needs and also providing long-term resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalization and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking.

Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Shri. S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narsimham Committee (NC) has major bearing on the issues considered by the Khan Working Group.

The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into a universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-by case approach towards allowing domestic financial institutions to become universal banks.

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.

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Products and Services offered by Universal Banks

The different products in a universal bank can be broadly classified into: Retail Banking. Trade Finance. Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch.

Retail Banking:

“Retail - banking is typical mass market banking where individual customers use local branches of larger commercial banks. Services offer include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so”

Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance.

Services provided by Retail Banks: Deposits Loans, Cash Credit and Overdraft Negotiating for Loans and advances Remittances Book-Keeping (maintaining all accounting records) Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

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Trade finance is related to international trade. While a seller (the exporter) can request the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract.

Other forms of trade finance can include trade credit insurance, export factoring, forfaiting and others. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions.

In short, trade finance means money lent to exporters or importers.

It includes the following services: Issuing and confirming of letter of credit. Drawing, accepting, discounting, buying, selling, collecting of bills of

exchange, promissory notes, drafts, bill of lading and other securities.

Treasury Operations:

Treasury management (or treasury operations) includes management of an enterprise's holdings. It includes activities like trading in bonds, currencies, financial derivatives and also encompasses the associated financial risk management.All banks have departments devoted to treasury management, as do larger corporationsBank Treasuries may have the following departments:

a) A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities

b) A Foreign exchange or "FX" desk that buys and sells currenciesc) A Capital Markets or Equities desk that deals in shares listed on the stock

market.

In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities for the bank's own account and capital, an Asset liability management or ALM desk that manages the risk of interest rate mismatch and liquidity; and a Transfer Pricing or Pooling function that prices liquidity for business lines (the liability and asset sales teams) within the bank.

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Banks may or may not disclose the prices they charge for Treasury Management products.

The operations include: Buying and selling of bullion. Foreign exchange Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents.

The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services like investment counseling for individuals, short-term funds management and portfolio management for individuals and companies. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government.

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Universal banking coupled with SWOT

The solution of Universal Banking was having many factors to deal with which further categorized under Strengths, Weaknesses, Opportunities and Threats:

Strengths :

1. Economies of Scale

The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Various Reserve Banks Committees and reports in favor of Universal Banking, is that it enables banks to exploit economies of scale and scope. It means a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifying activities.

2. Profitable Diversions

By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.

3. Resource Utilization

A bank possesses the information on the risk characteristics of the clients, which it can use to pursue other activities with the same client. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non-diversifiable risk analysis, etc. are useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in Research.

4. Easy marketing on the foundation a of Brand name

A bank has an existing network of branches, which can act as shops for selling products like Insurance, Mutual Fund without much efforts on marketing, as the branch will act here as a parent company or source. In this way a bank can reach the remotest client without having to take recourse to an agent.

5. One stops shopping

The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers.

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6. Investor friendly activities

Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's equity holding in a borrower firm, acts as a signal for other investors on to the health of the firm, since the lending bank is in a better position to monitor the firm's activities.

7. Easy handling of business cycles

Due to various shifts in business cycles, the demand for products also varies at different points of time. It is generally held that universal banks could easily handle such situations by shifting the resources within the organization as compared to specialized banks. Specialized firms are also subject to substantial risks of failure.

Because their operations are not well diversified. By offering a broader set of financial products than what a specialized bank provides, it has been argued that a universal bank is able to establish long-term relationship with the customers and provide them with a package of financial services through a single window.

Weaknesses:

1. Grey area of Universal Bank

The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.

2. No expertise in long term lending

In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may not make a big difference. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.

3. NPA problem remained intact

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The most serious problem of DFIs have had to encounter is bad loans or Non-Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting edge technology in operations are unlikely to improve the situation concerning NPAs. Most of the NPAs came out of loans to commodity sectors, such as steel, chemicals, textiles, etc. the improper use of DFI funds by project promoters, a sharp change in operating environment and poor appraisals by DFIs combined to destroy the viability of some projects. So, instead of improving the situation Universal Banking may worsen the situation, due to the expansion in activities banks will fail to make thorough study of the actual need of the party concerned, the prospect of the business, in which it is engaged, its track record, the quality of the management, etc.

ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs, considering the negative developments at Dabhol Power Company (DPC).

Threats:

Big Empires

Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance Ministry is also empathetic towards it. But there will be big empires which may put the economy in a problem. Universal Banks will be the largest banks, by their asset base, income level and profitability there is a danger of 'Price Distortion'. It might take place by manipulating interests of the bank for the self-interest motive instead of social interest. There is a threat to the overall quality of the products of the bank, because of the possibility of turning all the strengths of the Universal Banking into weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of qualities of bank products, due to over expansion. If the banks are not prudent enough, deposit rates could shoot up and thus affect profits. To increase profits quickly banks may go in for riskier business, which could lead to a full in asset quality. Disintermediation and securitization could further affect the business of banks.

Opportunities:

1. To increase efficiency and productivityLiberalization offers opportunities to banks. Now, the focus will be on

profits rather than on the size of balance sheet. Fee based incomes will be more

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attractive than mobilizing deposits, which lead to lower cost funds. To face the increased competition, banks will need to improve their efficiency and productivity, which will lead to new products and better services.

2. To get more exposure in the global marketIn terms of total asset base and net worth the Indian banks have a very long

road to travel when compared to top 10 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on sales, profits, assets and market value. It also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are much more than the asset base and capital of the entire Indian banking sector. In order to enter at least the top 100 segment in the world, the Indian banks need to acquire a lot of mass in their volume of operations.

Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. Here is the real need of universal banking, as the wide range of financial services in addition to the Commercial banking functions like Mutual Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall profitability.

3. To eradicate the 'Financial Apartheid'

A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA), a Chennai based association, has found out that, 'Though having a large number of branch network in rural areas and urban areas, the lowest strata of the society is still out of the purview of banking services. Because the small businesses in the city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn brokers, etc.

The respondents were businesses engaged in activities such as fruits and vegetables vendors, laundry services, provision stores, petty shops and tea stalls. 97% of them do not depend the banking system for funds. Not because they do not want credit from banking sources, but because banks do not want to lend these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It means with the help of retail and personal banking services Universal Banking can reach this stratum easily.

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Issues and challenges in Universal Banking

1. Challenges in Universal Banking

There are certain challenges, which need to be effectively met by the universal banks. Such challenges need to build effective supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others. Moreover norms stipulated by RBI treat DFIs at par with the existing commercial banks. Thus all Universal banks have to maintain the CRR and the SLR requirement on the same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable to the commercial banks. These are the major hurdles as perceived by the institutions, as it is very difficult to fulfill such norms without hurting the bottom-line. There are certain challenges, which need to be effectively met by the universal banks. Such challenges include weak supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others.

2. Issues of concern for Universal Banking:

Deployment of capital: If a bank were to own a full range of classes of both the firm’s debt and equity the bank could gain the control necessary to effect reorganization much more economically. The bank will have greater authority to intercede in the management of the firm as dividend and interest payment performance deteriorates.

Unhealthy concentration of power: In many countries such a risk prevails in specialized institutions, particularly when they are government sponsored. Indeed public choice theory suggests that because Universal Banks serve diverse interest, they may find it difficult to combine as a political coalition – even this is difficult when number of members in a coalition is large.

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Impartial Investment Advice: There is a lengthy list of problems, involving potential conflicts between the bank’s commercial and investment banking roles. For example there may be possible conflict between the investment banker’s promotional role and commercial banker’s obligation to provide disinterested advice. Or where a Universal Bank’s securities department advises a bank customer to issue new securities to repay its bank loans. But a specialized bank that wants an unprofitable loan repaid also can suggest that the customer issues securities to do so.

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Conclusion

The banking scenario has changed drastically. The changes which have taken place in the last ten years are more than the changes took place in last fifty years because of the institutionalization, liberalization, globalization and automation in the banking industry.

Universal banking is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years.

Universal banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business. Banks therefore, are now competing for increasing their business.

There is a need for constant innovation in universal banking. This requires product development and differentiation, micro-planning, marketing, prudent pricing, customization, technological upgrade, home/electronic/mobile banking, effective risk management and asset liability management techniques.

However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in universal banking business.

Furthermore, in all these customer interest is of chief importance.

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Parallel Loan

A parallel loan involves 2 parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other company’s subsidiary.’ This combines the low domestic borrowing rates with foreign-source financing of the foreign subsidiary

Need for parallel loanThere was a need for parallel loans because of the existence of the concept of currency risk.A form of risk that arises from the change in price of one currency against another. MNC’s especially face this kind of risk.

Example:Suppose U.S. subsidiary of British Petroleum (BP) with pound debt and operates domestically in the U.S. market

Operating cash inflows – DollarsInterest payments (to parent) – Pound

IF #1 Dollar appreciates with respect to poundDebt becomes less of a burden

IF #2 Dollar depreciates with respect to poundDollar interest might be unable to cover pound interest

A U.S. multinational with a British subsidiary will face similar exposure but in the opposite direction.So an MNC would prefer that different currencies are not involved in the inflows and the outflows of its subsidiaries.Also throughout the 1970s, the U.K imposed a tax on cross border currency transactions involving pound as a way of slowing the flow of pound out of the country, which made it expensive for both British and multinational companies to transfer funds.

Benefits

It legally circumvents the tax restrictions on cross border transactions

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Parallel loans allow each multinational to borrow domestically where it enjoys low borrowing costs

Reduce exposure to currency risk

Drawbacks

Default risk – Each loan in this arrangement is a separate agreement, so if one party defaults it does not release the other party from its obligations

Balance sheet impact- Parallel loans increase the debt to equity ratio of a company which can impair the ability of the parent firm to raise additional debt

Search costs- When parallel loans were first introduced, there was not an active market for them. The absence of dealers able to make a market in parallel loans results in high search costs and slow growth

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Syndicated Loan

A loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. The borrower could be a corporation, a large project, or a sovereignty (such as a government). The loan may involve fixed amounts, a credit line, or a combination of the two. Interest rates can be fixed for the term of the loan or floating based on a benchmark rate such as the London Interbank Offered Rate (LIBOR).

Syndicated credits are a very significant source of international financing, with signings of international syndicated loan facilities accounting for no less than a third of all international financing.

A project may require too large a loan for a single lender or require a special type of investor or lender with expertise in a particular asset class. For example, a transportation project, such as a high speed rail, may involve a group of investors and lenders, each specializing in a portion of the project, such as rail lines, cars, bridges and tunnels, and signal and control technologies. The whole group is referred to as a syndicate.

Syndicate members play different roles. Some just lend money. Others also facilitate the process. It is common to speak of an arranger, lead bank or lead lender that originates the loan, forms the syndicate and processes payments. But several syndicate members may share these tasks. Syndications with two or more arrangers are not uncommon. In a world where bragging rights are important for securing future deals, a bank may be called an arranger for nothing more than contributing a large part of the loan.

The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders (such as banks) or institutional investors like pension funds and hedge funds. Because syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower defaulting could cripple a single lender. Syndicated loans are also used in the leveraged buyout community to fund large corporate takeovers with primarily debt funding.

Syndicated loans are primarily originated by banks, but a variety of institutional investors participate in syndications. These include mutual funds, collateralized loan

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obligations, insurance companies, finance companies, pension plans, and hedge funds.

The creditors can be divided into two groups:

1. Senior syndicate members: These are led by one or several lenders, typically acting as mandated arrangers, arrangers, lead managers or agents. For these lenders syndicated loans can be a means of avoiding excessive single-

name exposure, in compliance with regulatory limits on risk concentration,

while maintaining a relationship with the borrower or it can be a means to

earn fees, which helps diversify their income.

In essence, arranging a syndicated loan allows them to meet borrowers’

demand for loan commitments without having to bear the market and credit

risk alone.

2. The junior banks: They typically bear manager or participant titles. These banks may be motivated by a lack of origination capability in certain types of transactions, geographical areas or industrial sectors, or indeed a desire to cut down on origination costs. While junior participating banks typically earn just a margin and no fees, they

may also hope that in return for their involvement, the client will reward them

later with more profitable business, such as treasury management, corporate

finance or advisory work.

The borrower in a syndicated loan incurs two expenses. One is the interest on the loan. The other is the fee. The picture below shows the structure of fee in a syndicated loan.

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History

Syndication has been used for decades on an as-needed basis by banks wanting to spread the risk of large loans. The first phase of expansion began in the 1970s. Between 1971 and 1982, medium-term syndicated loans were widely used to channel foreign capital to the developing countries of Africa, Asia and especially Latin America. Syndication allowed smaller financial institutions to acquire emerging market exposure without having to establish a local presence. Syndicated lending to emerging market borrowers grew from small amounts in the early 1970s to $46 billion in 1982, steadily displacing bilateral lending.

The market took off following the first, 1973, oil shock. As the price of oil skyrocketed, banks recycled deposits from oil exporting countries as syndicated loans to oil importing countries, especially less-developed countries in Latin America. The second oil shock, of 1981, and the Fed's experimentations with monetarism, caused interest rates to shoot up in the early 1980s. Lending came to an abrupt halt in August 1982, after Mexico suspended interest payments on its sovereign debt, soon followed by other countries including Brazil, Argentina, Venezuela and the Philippines. Lending volumes reached their lowest point at $9 billion in 1985.In 1987, Citibank wrote down a large proportion of its emerging market loans and several large US banks followed suit. That move catalyzed the negotiation of a plan, initiated by US Treasury Secretary Nicholas Brady, which resulted in creditors exchanging their emerging market syndicated loans for Brady bonds, eponymous debt securities whose interest payments and principal benefited from varying degrees of collateralization on US Treasuries.

While banks became more sophisticated, more data became available on the performance of loans, contributing to the development of a secondary market, which gradually attracted non-bank financial firms, such as pension funds and insurance firms. Eventually, guarantees and risk transfer techniques enabled banks to buy protection against credit risk while keeping the loans on the balance sheet. The advent of these new risk management techniques enabled a wider circle of financial institutions to lend on the market, including those whose credit limits and lending strategies would not have allowed them to participate beforehand. As a result of these developments, syndicated lending has grown strongly from the beginning of the 1990s to date. Signings of new loans – including domestic facilities – totaled $1.6 trillion in 2003, more than three times the 1993 amount.

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During the 1990s, an active secondary market for syndicated loans emerged. This was fueled partly by the recession of 1991, which forced some banks to trim their balance sheets. Secondary market trading continued a convergence of the syndicated loan and bond markets. As those markets converge, the disparity in how they are regulated presents both opportunities and legal uncertainties. In the United States, most bonds are regulated under the 1933 Act and 1934 Act. Bank loans generally are not, and arrangers of syndicated loans invoke a number of exemptions under those acts to avoid regulation.

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Types of Syndicated Loan

There are three types of syndicated loans:

Underwritten loan: In this case, the arrangers commit to a particular sized loan. It is up to them to recruit enough syndicate members to secure that full amount. Should they fail, they make up the shortfall, extending a larger portion of the loan than they had perhaps wanted.

Best efforts deal: Here the arrangers try to recruit enough syndicate members to achieve a desired loan size. If they fail, however, the borrower simply receives a smaller loan than it had hoped for.

Club deal: This is a smaller loan usually between $25–100 million, but can be as high as $150 million. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

Credit facilities

Syndicated loans facilities (Credit Facilities) are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the requirement.

1. A revolving credit line allows borrowers to draw down, repay and re-borrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowing.

2. A revolving credit line allows borrowers to draw down, repay and re-borrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowing. This further includes:

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i) An amortizing term loan (A-term loan or TLA) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication.

ii) An institutional term loan (B-term, C-term or D-term loan) is a term-loan facility with a portion carved out for nonbank, institutional investors. These loans are priced higher than amortizing term loans because they have longer maturities and repayment schedules.