Tranche (translated from French) means a part or a share of securities, bonds, the issue of which takes place to improve market conditions.
What are tranches?
In view of the specifics of using this financial instrument, it is possible to conditionally distinguish the scope of its application as follows:
- Investing and securities market.
- Lending to organizations in banks.
- Provision of IMF tranches to states.
The understanding of the word "tranche" should come from the above distinctions and ways of providing financial assistance. What are tranches in investing? This is an issue of securities (CB) with the same conditions, regardless of when part of the total issue will be used. That is, part of the Central Bank is provided gradually, when the terms of the transaction by the borrower were fulfilled in terms of payment for the first issue.
What are tranches in lending? The Bank sets a limit on disbursement of funds for the borrowing organization (credit line), and within the framework of this restriction gives it the necessary amounts. At the same time, the borrowing organization has the right to use a new share of the loan upon request, if all obligations to pay the debt were fulfilled after the first tranche.
What are tranches of the International Monetary Fund (IMF)? They are comparable to the line of credit for organizations, with the exception of the conditions for their provision. As a rule, the IMF puts forward certain requirements, if not complied with, the country may be left without financing. IMF requirements may be political and economic in nature.
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 above name. Under the agreement between the bank and the borrower, all conditions for repayment and provision of a credit line are agreed. The focus of this document is on the issue limit. It is not possible to exceed the estimated limit under the tranching agreement. But the bank may impose additional interest on the unused balance of part of the loan funds (about 0.5% per year, depending on many factors). Thus, the bank encourages the borrower to take full advantage of the loan.
The conditions under which the loan tranche is issued are listed below.
- Refunds in accordance with the payment schedule.
- Accrual of interest on the use of credit funds.
- The solvency of the company or additional security for the loan in the form of the borrower's own profitable assets.
Tranches in lending
What is the provision of tranche in the conditions of one loan agreement? Understanding such a question is quite easy, if you do not forget the meaning of the word tranche. Recall from French it translates as "part". Accordingly, the provision of a tranche is the issue 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 term of the contract, and at clearly set deadlines. All the nuances of the transaction are prescribed 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 the tranche at the request of the borrowing organization.
Credit Line Benefits
In contrast to the issuance of a standard loan by a bank, a credit line is more attractive for both borrowers and financial institutions. The main advantages of tranching under a credit line are as follows.
- Unlimited number of trenches. Repeated use of credit funds. A line of credit can be revolving with a certain limit of issuance and not revolving. In the second version of the loan, the organization can use several tranches, but their total amount cannot exceed the established limit. If the credit line is renewable, then upon repayment of the taken tranche, the borrower can use it again. For example, a credit line limit of $ 1,000,000. The borrower requested the first tranche of $ 300,000, paid it during the contract period (2 months), which means that he can use the maximum of $ 1,000,000 again. And in the case of a non-revolving credit line, the next limit of the loan for him would be only 700,000 dollars.
- Interest for using the tranche can be accrued in various ways - it can be standard, that is, fixed regardless of the part of the limit provided for the entire duration of the contract. Or they may have specific accrual conditions. The bank may offer the borrower various conditions for calculating interest for each tranche. In any case, interest is accrued only on the spent amount (tranche).
- The debt is written off automatically upon receipt of funds to the account of the organization, which is very convenient, as it saves time.