Large corporations with operations spanning several countries are usually faced with the daunting task of raising capital to finance special projects or purchases. Raising money in various currencies or being forced to exchange one currency for another is often expensive.
What is a multi-currency note facility?
It is no secret that corporations raise capital by venturing into the debt market. The capital raising spree allows the firms to raise capital at some of the most affordable costs. However, for companies engaged in international trade or operations, raising a loan in a single currency is usually not an option.
A multi-currency note facility is often seen as the best alternative for companies looking to access various currencies through a single credit facility. Consequently, it is a special type of loan that accords borrowers’ access to capital across multiple currency denominations.
Instead of a loan facility coming only in dollars, the multi-currency note loan facility is usually denominated in, say, yen, dollar, euro, and the British pound. The diverse denomination allows the borrowers to finance payments with ease by selecting a preferred denomination depending on the jurisdiction the payment will go.
Multi-currency note loan facilities allow multinationals to fund special projects using specific denominations within the facility. The facility averts the need of having to take another loan, in the case of a single loan, to gain exposure to a given currency for a specific transaction.
The credit facility has grown in popularity in recent years amid a rise in cross-border transactions. Corporations and banks looking to access capital or money in different regions are forced to turn to multi-currency note financing given the synergies it offers.
Similarly, the Eurocurrency market has come into existence, providing a platform and framework through which international banks exchange and exchange foreign currencies with one another.
How they work
Financial institutions such as large banks hold funds in various currencies in what is often referred to as Eurocurrency. For instance, a British bank holding a deposit in US dollar amounts to a Eurocurrency, as is the case with a US bank having some deposits in sterling pounds.
With deposits in various currency denominations, the financial institutions are always in a position to issue loans denominated in various currencies tailored to meet client’s needs. Therefore, whenever a client wants to be issued a loan with the funds issued in more than one currency, the financial institutions can finance the same given their diverse deposit holdings.
For instance, a US company doing business in the UK, Germany, and Japan can pursue a multicurrency loan facility to meet its capital requirements in the three countries. In this case, it will be issued with a loan denominated in the British pound, euros, and the Japanese yen.
Consequently, whenever the company wants to pay for items in Germany, it will utilize a portion of the euros in the loan facility to make payments. Similarly, whenever the company wants to pay for items or services rendered in Japan, it will pay using yen holdings in the facility without taking another loan.
In this case, the company can finance all of its operations in diverse locations using one credit financial product. In addition, the company can operate in more than one nation, even on those with limitations on currency availability.
Euro Medium Term Note Guide
Unlike normal loans or credit facilities, multi-currency loan facilities come with varying terms. For instance, loans under this facility reprise about every six months. In this case, borrowers must be ready and willing to accept the terms.
With the Euro Medium Term, Note payments are fixed and come with a maturity of less than five years. The instrument allows corporations and investors to borrow capital with ease in foreign countries. Being a flexible debt instrument, it comes with an agreement that details the requirements.
Additionally, EMTs allow borrowers to choose in what currencies they would like to get their credit or loan facility pegged. In addition, one can select the currency to be used for refinancing the loan EMTNs stand out partly because they allow borrowers to carry out drawdowns with a varying maturity date. The loans are also tailored to meet specific capital needs.
Multi-currency loan facilities pros
While it is a complex financing solution, a multi-currency loan facility offers a wide range of financing products that can be accessed under a single ceiling. They also come with the highest level of flexibility and efficiency by providing the possibility of accessing multiple credit products simultaneously.
Additionally, they are some of the most affordable capital raising instruments for corporations and investors looking to do business in multiple countries. Multi-currency loan facilities avert the need of having to take multiple loans to access capital in various currencies.
Drawbacks
A multi-currency note facility exposes borrowers to significant risk, given that a credit line is issued in multiple currencies. The foreign exchange risk is exacerbated, which can result in increased costs of financing the loans.
Unlike when a loan is denominated in one currency, the cost of a loan with a multi loan facility depends on the currency rate fluctuations in the individual currencies. In addition to assuming the foreign exchange risk, some lenders decide which currency will be used for refinancing the loan. In most cases, repayment occurs at the predetermined exchange rate.
Bottom line
A multi-currency note facility is an important lending instrument synonymous with multinationals or companies doing business in multiple locations. The facility has grown in popularity as it allows firms to borrow in multiple currencies on a single credit line. Therefore, it offers a way of financing operations in multiple locations without having to pursue a second loan.
