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?

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

1. Investing and securities market.
2. Lending to organizations in banks.
3. Provision of IMF tranches to states.

The understanding of the word "tranche" should proceed from the above distinctions and methods of providing 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 part 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 the first demand, if all obligations for payment of the debt were fulfilled after the first tranche.

What are the tranches of the International Monetary Fund (IMF)? They are comparable to a credit line for organizations, except for the terms of their provision. As a rule, the IMF puts forward certain requirements, 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 focus 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 part of the 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 tranches in the conditions of a single loan agreement? Understand this question is quite 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 provided both at the request of the borrower 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 to both borrowers and financial institutions. 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 revolving credit line is $ 1,000,000. The borrower demanded the first tranche of $ 300,000, paid it during the contract period (2 months), so the maximum he can again use 1 000 000 dollars. And in the case of a non-revolving credit line, the next limit of the loan for him would be only $ 700,000.
2. Interest for using the tranche can be charged in various ways - they 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 charging 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.