Loans based on Bank Bill rate

Discussion in 'Loans & Mortgage Brokers' started by Beano, 16th Mar, 2020.

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  1. Beano

    Beano Well-Known Member

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    Can someone explain the pluses and negatives of having a margin on top of the Bank Bill rate for commercial loans ?
    Borrowings $20m +
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Negatives:
    • Short term only (180 days max IIRC)
    • Uncertainty of refinancing
    Positives:
    • Certainty of rate
    • Margin may be negotiated (within reason)
    • Can be cheaper than other loans
    • Interest is prepaid
     
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  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The uncertainties can be quite signifcant. Bank covenants can allow them to refuse a rollover. Or reset pricing in some events.

    Another benefit is rates can also be fixed. This is achieved through a bank bill Treasury swap for example for three years. Each rollover will be fixed to that rate for the term. Unless a fixed rate is used the facility will usually have a variable rate + a margin to the official bill rates (BBSW is an example and is a reuters based interbank rate published daily) a lender may also charge fixed fees for each rollover etc. Terms are commonly 30, 60, 90, 120 and 180 days. 90 and 180 days are preferred by the market to align with bank bill futures markets. Bank bill swap markets are the basis for fixed rate home loans.

    Technically interest is not prepaid and this is a common mis-description. Instead the loan is discounted so that the sum due less the interest is advanced on day one ie $96,545.45 not $100,000. Many lenders will have round multiple "face values" for the bill issued ie $100K. Interbank markets trade (sell/buy) in multiples of $10m+ in most instances although $100M- $500m are also common. The lender sells this bill to an investor which is why they are favoured by interbank lenders as this "security" can be sold to remove the risk from the bank books. On day 90 eg the face value of the bill is payable. The gap between the two prices on day 90 is the interest paid.

    Source - I was a major bank money market dealer
     
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Annual Reviews, but at that level of concentration risk Id suggest you have no option with that lot

    In the current times, where possible we are guiding clients more towards term based loans with no annual reviews, since annual reviews can include revals with attendant margin calls.

    ta
    rolf
     
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  5. Beano

    Beano Well-Known Member

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    term based loans with no annual reviews is what I have use to