What are tranches? Terms of their provision

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Tranche (tranche) in French means a part or share of securities, bonds, the issue of which takes place to improve market conditions.

What are tranches?

Due to the specifics of the use of this financial instrument, it is possible to conditionally delineate the scope of its application as follows:

1. Investing and the securities market.
2. Lending to organizations in banks.
3. Providing IMF tranches to states.

Understanding the word "tranche" should come from the above distinctions and ways of providing financial assistance. What are tranches in investing? This is the issue of securities (CB) with the same conditions, regardless of when part of the total issue will be used. That is, a part of the Central Bank is provided gradually, when the terms of the transaction were fulfilled by the borrower in terms of paying for the first issue.

What are tranches in lending? The bank sets a limit on the issuance of funds for the borrowing organization (credit line), and within the framework of this limit, issues the necessary amounts to it. At the same time, the borrowing organization has the right to use a new share of the loan on demand, if allobligations to pay the debt were fulfilled after the first tranche.

What are International Monetary Fund (IMF) tranches? They are comparable to a credit line for organizations, except for the terms of their provision. As a rule, the IMF puts forward certain requirements, in case of non-compliance with which the country may be left without financing. IMF demands can be political and economic.

Credit tranche and terms of its provision

What is a credit tranche, described above. Often there is the concept of "credit line", which is identical to the name described above. Within the framework of the agreement between the bank and the borrower, all the conditions for repayment and the provision of a credit line are stipulated. The focus of this document is on the issuance limit. It is impossible to exceed the calculated limit under the tranche agreement. But on the unused balance of part of the loan funds, the bank may impose additional interest (about 0.5% per year, depending on many factors). Thus, the bank encourages the borrower to take full advantage of the loan provided.

The conditions under which the loan tranche is issued are listed below.

1. Refunds in accordance with the payment schedule.
2. Charge of interest for the use of credit funds.
3. Solvency of the company or additional collateral for the loan in the form of the borrower's own profitable assets.

Tranches in lending

What is the provision of a trancheunder the terms of one loan agreement? Understanding such a question is quite easy, if you do not forget the meaning of the word tranche. Recall that from French it is translated as "part". Accordingly, the provision of a tranche is the issuance of a share of funds within the established limit for the borrower.

Each tranche can be provided both at the request of the borrower during the period of the contract, and within a clearly defined time frame. All the nuances of the transaction are spelled out in the loan agreement. The borrower is obliged to fulfill its obligations on time and in full. And the lender, in turn, is to provide a tranche at the request of the borrowing organization.

Benefits of a line of credit

Unlike issuing a standard bank loan, a credit line is more attractive for both borrowers and financial institutions. The main advantages of tranching under a credit line are as follows.

1. Unlimited tranches. Repeated use of credit funds. A credit line can be revolving with a certain disbursement limit and non-revolving. With the second loan option, the organization can use several tranches, but their total amount cannot exceed the established limit. If the credit line is renewable, then when repaying the taken tranche, the borrower can use it again. For example, the limit on a revolving line of credit is $1,000,000. The borrower claimed the first tranche of $300,000, paid it during the contract period (2 months), which means that hecan use $1,000,000 again. And in the case of a non-revolving line of credit, his next limit would be only $700,000.
2. Interest for the use of the tranche can be calculated in various ways - they can be standard, that is, fixed, regardless of the provided part of the limit for the entire duration of the contract. Or they may have specific accrual conditions. The bank may offer the borrower different terms of interest calculation for each tranche. In any case, interest is charged only on the spent amount (tranche).
3. Debt is written off automatically upon receipt of funds to the settlement account of the organization, which is very convenient, as it saves time.