Revolving credit is a way in which banking institutions can make the money they need to operate.
Most of the time, these loans are unsecured. If bankers take security, it could well be one of the following: property, Accounts Receivable, plant or equipment, bonds or shares, bills of lading, and inventories.
If the money is raised in the European market, the loans are floating rate linked to London Interbank offered rate. To begin with, this rate fluctuates throughout the day. For purposes of loan agreements, LIBOR is that stated by the reference bank at 11 AM. If the loan is bilateral, it may be simply be the lending banks own LIBOR at 11 AM on the quarterly or six monthly day on which the loan is rolled over at a new rate of interest. If it is a syndicated loan, three reference banks may be nominated and LIBOR is the average of the three. It may also be quoted as the “BBA”, or colloquially, the screen rate. The British Bankers Association lists 16 reference banks. Telerate omits the four highest and four lowest of the 16 quoted rates and averages the remaining eight. Telerate disseminates this on their dealing screen at 11 AM each day — hence the reference to the screen rate. LIBOR, of course, maybe be sterling, dollar, yen, or any other currency.
A term often used in the loan documentation for standby and revolving credit is swing line facility. Sometimes the borrower is due to repay investors in, say, dollars on a particular day and discovers late in the day that they cannot. Swing line is a guarantee of same day dollars in New York to meet this emergency. One banker has described as as ‘belt and braces’ and reassuring to credit ratings organizations looking at an issuer’s loan facilities.
The risks of revolving credit, and its ability to benefit the borrowe and the lender are large in number. Both stand to benefit greatly from the transactions.
If you liked reading this financial topic then you may be interested in short term trading strategies as well as how to use a practice account with real data.