What is a tranche? Terms of their provision

Tranche (translated from French) means part or share of securities, bonds, the issue of which is to improve the market conditions.

What is a tranche?

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

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

Understanding the word "tranche" must come fromthe above-described distinctions and methods of rendering financial assistance. What is a trench in investing? This issue of securities (CB) with the same conditions, regardless of when part of the total issue will be used. That is, a portion of the Central Bank is provided gradually, when the terms of the transaction were fulfilled by the borrower in terms of payment for the first issue.

What are tranches in lending?The Bank establishes a limit for the issuance of funds to the borrowing organization (credit line), and within the limits of this restriction issues the necessary amounts. At the same time, the borrowing organization has the right to use a new loan share on demand, if all debt obligations were met after the first tranche.

What are the tranches of the International Monetary Fund(IMF)? They are comparable to a credit line for organizations, with the exception of the terms of their provision. As a rule, the IMF makes certain demands, in case of non-observance of which the country can remain without funding. IMF requirements can be political and economic.

Credit tranche and terms of its provision

What is a credit tranche is described above.Often found the concept of "credit line", which is identical to the above-described name. Within the framework of the agreement between the bank and the borrower all conditions for repayment and provision of a credit line are stipulated. The emphasis in this document is on the issuance limit. Exceeding the settlement limit under the tranching agreement is impossible. But the bank can impose additional interest on the unused balance of loan funds (about 0.5% per year depending on many factors). Thus, the bank stimulates the borrower in order that he fully avails himself of the loan.

The conditions under which a credit tranche is issued are listed below.

1. Refunds in accordance with the payment schedule.
2. Interest accrual for using credit funds.
3. 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 a tranche in a singleloan agreement? Understand this question is pretty easy, if you do not forget the meaning of the word tranche. Recall from the 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 granted both as aThe borrower's requirement during the contract period, and in a clearly defined time frame. 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, provides a tranche at the request of the borrowing organization.

Advantages of credit line

Unlike the issuance of a standard loan by a bank,The credit line is more attractive both for borrowers and for financial organizations. The main advantages of tranche within the credit line are as follows.

1. Unlimited number of tranches.Repeated use of credit. The credit line can be renewable with a certain delivery limit and not renewable. In the second version of the loan, the organization can use several tranches, but their total amount can not exceed the established limit. If the credit line is renewable, then when the tranche is repaid, the borrower can use it again. For example, the limit for a credit revolving line is $ 1,000,000. The borrower demanded the first tranche of $ 300,000, paid it during the contract period (2 months), so, as much as possible, he can again use $ 1,000,000. And in the case of a non-revolving credit line, the next limit of the loan for him would be only $ 700,000.
2. The interest for using the tranche can be accruedin various ways - 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 can offer the borrower various conditions for calculating interest for each tranche. In any case, interest only accrues on the amount expended (tranche).
3. Debt is written off automatically upon receipt of funds to the settlement account of the organization, which is very convenient, since it saves time.