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@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax 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
     
  6. headsonbeds

    headsonbeds Well-Known Member

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    I've been chatting with my lender and they've given my a few options to think on for my next 3 monthly reset:

    Loan is a commercial lend of $1.5mill, 3 monthly reset at BBSW + 1.9%
    The options are to stay as is and follow BBSW as above:

    OR A) Fixed rate until Maturity which is 3.81% - term matures in late 2025

    OR B) Zero cost collar (Top and Bottom range bound rates). No cost option - the higher the cap the lower the floor. 2 examples they gave are – 4.5% cap rate with 3.6% floor & 4.2% cap with 3.7% floor.

    OR C) Premium cost Collar – 1) Cap at 4% with 3% floor = $11k premium.
    2) Cap at 4% with 3.5% floor = $7k premium.

    Thought I'd throw this out there to the commercial brains trust @Beeno @Scott No Mates @Redom @Paul@PAS and many others
    Anyone done the collars before? Obviously depends on Interest Rate prediction and who knows where that's going now!!!!!
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Who knows ?? The two other options dont even mention the term where option a is 18mths. Thats not a long duration.
    There is also option 4...Variable rate. Can you do part ? Really these comparisons should benchmark where you think actual variable BBSW 90days may be.
    Note I refer to BBSY below. BBSY and BBSW differ. BBSY is a mid point rate and may be up to 5pts higher than BBSW.

    The major element is the market rate. I have a client bills rollover history on my desk. $2m. Back in Nov 21 it was BBSY 0.0597 + a 1.91%margin so 1.9697 = $3,282
    May 23 its BBSY 3.8791 + 1.91% = 5.7891 and $9648
    Now I would go back to my financial markets days and seek maths to find some logic....

    So if the term for that product was 18mths then the $11k premium cost may equate to (18 x $9648) = 6.3% which seems a very high cost that must be saved through getting a lesser rate. Will you save 6.3% of actual rates ? I have doubts. You may.. Do you know what that target rate may be ?
    (Note this is based on $2m and other factors. The target rate saving on 1.5m would be possibly 8.5% of total interest)

    Rate predictions by the RBA itself show just how its a punt. I recall old data that indicated 97% of economists and official dealers were unable to predict rate rises and falls and exchange rates. The RBA showed how it could pick a nose better than predict domestic rate direction.