16 Sep 2013

Loan Characteristics

Bank loans have the following attributes:
  • They exhibit flexible payment structures
  • They do not require public disclosure
  • As banks are lending the money directly, they do not require credit ratings. However, more non-bank lenders are becoming part of lending syndicates. There is a secondary market in loans, and loans are being repackaged into structured credit instruments. These factors have led to more loans being rated
  • The interest on loans is usually floating. The most common index is LIBOR, with a margin added. The magnitude of the margin depends on the credit rating and sector of the company, the length and size of the loan, and how aggressive the banks are in lending money at the current point of the business cycle
  • Loans can usually be repaid early at the option of the borrower. This is generally not the case for bonds
  • Loans are more likely to have restrictive covenants than bonds (although more recent bond issues have tended to give borrowers less financial freedom)

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