International Credit and Bond Markets
In a financial world marked by uncertainty, borrowers prefer using instruments which provide protection against exchange risks and changes in interest rates. These operations also have the advantage of being off-balance sheet and are favored by CCC.
The majority are accompanied by a medium-term credit line pursuant to which the lenders undertake to assure the financing of the borrower, if the short-term notes cannot be placed in the market. If the market continues to develop satisfactorily, the trend towards eliminating these back-up credit lines and correspondingly reducing the cost to borrowers should be reinforced. CCC has developed its capacity to place notes with international, institutional investors. Nevertheless, it maintains a cautious attitude. CCC is particularly concerned with managed or co-managed facilities using Universal Variable Rate Notes.
Universal Variable Rate Notes (UVRNs) are intermediate-term, subordinated, quarterly interest- paying obligations. After a brief fixed rate interest period (called the "teaser" period), the notes pay interest at rates which adjust quarterly based on certain benchmarks, such as 90-day U.S. Treasury bill corporate equivalents, 90-day LIBOR, the prime rate, and 10 year U.S. Treasury yields. The notes typically are convertible at the issuer's option into fixed-rate notes with predetermined characteristics (maturity, call price, sinking fund, etc.). Usually, after five years, the "fix" becomes mandatory. Before the mandatory fix date, it is sometimes possible for the holder to fix the floater's rate by doing an interest rate swap.
It must be pointed out that UVRNs are not some complicated, difficult to understand, very specialized instrument. They are real, and of real value. A UVRN is essentially a note with a variable interest rate, which is denominated so that it is acceptable in virtually all financial transactions.
For those seeking funding:
(a) A transaction structured on such instruments can be of considerable interest, since they protect against a rise in interest rates, which, of course, have an inverse relationship to bond prices.
(b) Another possibility is that UVRNs can also offer a lower rate of interest in the first couple of years of project funding, increasing as income and profits increase. Maturity periods are generally up to 20 years, but, in some cases, can also be longer.
(c) Such structures can often support a higher funding amount that in a standard transaction.
Despite their advantages and flexibility, UVRNs do not suit all cases where funding is required. In many cases, simply a standard loan transaction is the best funding option, and the most economical for the borrower. Feel free to consult our Project Finance Department with any proposal.
UVRNs offer investors:
(a) A higher rate of interest than is available on short-term assets. Interest rates are usually set based on several benchmarks and represent the highest of the various formulas. There is usually no "cap" or "floor".
(b) An opportunity to "fix" at an attractive spread over U.S. Treasuries when the market price of the UVRN is taken into consideration. The "fix" formula is normally at a ratio to U.S. Treasuries.
(c) Preservation of capital - Because the coupon adjusts according to market rates of interest, it is designed to maintain the UVRN's price if market yield spreads and credit quality does not change materially.