Non-Bond Loan Agreement: Fill & Download for Free

The different language used by banks vs bondholders usually differentiates these two creditor classes rather than when they entered into these creditor agreements with the obligor.The position of a lender/creditor is determined in the contract between the borrower and the lender/creditor. The statement that “this debt will rank “pari passu” with all other senior unsecured indebtedness, is the usual determinant. However, bank lenders seek to rank senior to bondholders and other non-bank senior creditors, by changing the designation from senior unsecured creditors to “bank lenders”.If bank lenders were the first lenders to the company, bondholders would be effectively subordinated to the bank lenders if the bond was issued subsequently.There are other features in a bank loan agreement where the lenders will effectively subordinate (usually called structurally subordinating) bondholders. These are found in the banks’ financial covenants. Language is added where the banks have the right to accelerate their loans if various financial covenants are violated. If the bondholders do not have cross default/cross acceleration language or a negative pledge in their bond agreements, the banks can force a change to the terms of their loan to a secured loan or use other means to further subordinate the interests of a bondholder by using their power to call a default if the borrower fails to agree.In turn, bank lenders also prevent bondholders from subordinating the lenders by using negative pledges in their loan agreements as well as denying the bondholders cross default or cross acceleration language.There are numerous other ways that the banks try and protect their senior status. Among these is the use of Material Adverse Change in the loan covenant section. The courts have sought to define this clause to avoid it being used as a catch all to trigger, or threaten to trigger, default, but it remains a standard tool for bank lenders to avoid drawdowns on a committed loan when the banks wish to reduce their exposure to a company facing financial uncertainty.

China is helping African and Africa is helping China! Any other news you will hear is western media propaganda.NB: (Long but Interesting post ahead)Imagine if you could, a world in which Africa is completely beholden to China — a world in which China is so obsessed with controlling Africa that it is willing to risk billions of dollars by trapping African countries in debt. As an African, it is a world hard to imagine for several reasons. For starters, what would China gain that it already is not getting from Africa by impoverishing it?Apparently, that would allow China to influence decisions of African states. There are at least also two reasons why this would be politically suicidal. Firstly, it would discredit the “Beijing Consensus” as an alternative to the Washington consensus.Secondly, although Africa is a small player globally, it has the largest voting block at the U.N. general assembly. It’s therefore likely that an Africa feeling hard done by China would unnecessarily complicate Beijing’s attempts at global leadership at the multilateral level possibly making the isolation of China easier.Interestingly, Africa debt statistics also don’t support the accusation. The globally accepted debt ceiling for developing countries is a debt-to-GDP ratio of 40%. Africa’s current debt-to-GDP ratio stands at 50%. While loans from China grew at a very fast rate especially between 2011 and 2016, the reality is that Chinese loans account for an insignificant portion of Africa’s total debt stock (5%).Additionally, only three of the 12 African countries under high debt distress have borrowed heavily from Beijing. They are Angola, Djibouti and Zambia. Loans to Djibouti are all toward the construction of bulk infrastructure aimed at reducing the cost of doing business and fostering regional integration such as a railway and water pipeline linking Ethiopia and Djibouti and the expansion of the country’s main port enabling the country to handle more cargo as well as meet sanitary and phytosanitary standards for exporting livestock.In Zambia, there is sufficient evidence showing that its debt distress primarily emanates from the issuance of bonds denominated in foreign currencies. Over the last five years, the yield on Zambia’s bonds has increased from 6% to 17% forcing the country to borrow an extra $750 million to service bond payments, according to a Bloomberg report. Zambia is probably the country where the biggest form of Sino-phobia has raised its head when it comes to talk of Chinese loans.Clearly false claims have been peddled that China is about to take over some national assets such as the international airport and the national electricity utility company. It is inconceivable that China or any lender, would want to take ownership of assets that are not profitable. In the case of Zambia’s airport for example, on a busy day, the airport handles a total of about 13 passenger flights and an average of 10 flights a day.A big part of the airport’s lack of profitability is simply the lack of enough traffic numbers — something that can’t be solved by just changing management or ownership. Similarly, there are policy and structural issues affecting the national electricity utility company which would still render it loss making even after any takeover. That leaves Angola as the only country where Chinese loans are greater than non-Chinese loans — one country out of 54!That said, Angola has its nuances. For example, senior Angolan officials privately admit that China pre-conditioned continued loans on the country securing a program with the IMF — hardly the actions of a country hellbent on holding Angola captive to its wishes and demands. More controversial has been China’s “resources-for-infrastructure” approach in which countries pay for infrastructure using commodities; popularly known as ‘Angola-mode’ has been routinely frowned on. One can only guess that this is because it is seen as a new Chinese way of doing things that is out of sync with the Washington Consensus.While the practice is indeed different, it is not necessarily new. China or rather, Japan used the same approach with China many years ago. At the time, China was poor but had natural resources that Japan needed. Chinese loans have also been accused of promoting bad governance in Angola even though the World Bank World Governance Indicators have consistently shown an improvement in government effectiveness, regulatory quality and the rule of law since 2000.What external factor or player then is the cause of spiraling African debt? Before answering that, it is important to accept that a genuine concern about Chinese loans to Africa is the opaqueness of the loan conditions — especially in countries where the process of the state securing a loan is subject to constitutional oversight.This doesn’t make China responsible for Africa’s debt as available data strongly points to the fact that access to concessional lending to African countries diminished remarkably after the 2008 financial crisis as the main reason. This coupled with the fact that several African countries (such as Zambia and Ghana) graduated into middle-income status and therefore lost access to concessional funding.Confronted by the absence of concessional financing, African countries have resorted to private debt at high interest rates which are frankly unsustainable, as the Zambia example shows. In fact, according to S&P, private loans from non-Chinese sources account for 72% of Africa’s debt stock. The concessional nature of Chinese loans are hence attractive and pretty much a rational option.Chinese loans are attractive for African governments because of at least three other reasons. Firstly, Africa is confronted by a huge infrastructure gap estimated at around $170 billion annually. To correct this, African leaders launched the Programme for Infrastructure Development in Africa (PIDA). The PIDA naturally dovetails with China’s focus on infrastructure assistance and the Belt and Road Initiative, providing an opportunity for Africa to reduce its infrastructure deficit.Coupling this, as several senior African government officials have told me, is the fact that China’s broader assistance to Africa breaks away from past development assistance models to Africa that were based on stringent austerity measures and is not like the approach of other partners who market themselves as experts in African development problems. The new U.S.-Africa strategy for example has been criticized for not consulting with African countries and for its focus on China and not African development initiatives.Inevitably what will matter for Africa’s development is not where the loans come from but the extent to which Africa can use loans to enhance economic productivity in general and their ability to us use the assistance to protect national economies from exposure to commodity price fluctuations.This requires collaboration by Chinese and non-Chinese development partners to assist Africa to reduce the cost of doing business and create employment which will in turn broaden African governments’ revenue base.Furthermore, greater transparency in loan agreements would also facilitate a collaborative approach to assisting Africa by reducing the default risk for all parties (Chinese and non-Chinese).

Term repurchase agreements allow banks to temporarily boost their cash reserves over a fixed term, before returning borrowed cash to the Fed at the end of the term. On the other hand, quantitative easing are designed to permanently inject new funds into the banking system.The former is “lights-on” maintenance operation (“policy neutral”), the latter is “expansionary” active intervention (“policy easing”). There are a number of key distinctions between the two:In overnight repo and term repo operations, the bond collateral given to the Fed may include Treasuries, Fannie Mae and Freddie Mac debt, or agency mortgage backed securities (MBS) of varying maturityIn quantitative easing, Fed’s bond purchase criteria are very specific: Treasury notes and bonds must meet maturity requirements, and MBS bonds would need to be in the right duration (30 or 15-year) and from specified issuers such as Fannie Mae, Freddie Mac, or Ginnie MaeBonds taken by the Fed in both operations will be kept on its balance sheet; the bonds used as collateral for overnight and term repo will be returned (“repurchased”) to borrower at the end of their repo terms, while bonds bought from QE purchases will be held until maturity or sold (the Fed has never actively sold QE purchases)Repo operations are designed to address market’s liquidity need, while QE is implementation of long-term monetary policyBorrowed funds are the focus repo operations, with the bonds’ role limited to collateral. This is not the case in QE, for both the bank reserve creation (distribution of “printed” funds to banks) and the quantity and type of bonds added to central bank balance sheet play crucial policy rolesIn technical terms, a repurchase agreement is known as sterilized intervention, while the latter is non-sterilized as it expands total bank reserves in the financial system.Liquidity injection via repurchase agreementsOvernight and term repurchase agreements (repo) are essentially the same operations except the length which cash is borrowed. Since the cash borrowed are returned to the Fed at the end of the agreed-upon term, no new bank reserves are permanently injected into the financial system.Below is a typical workflow of overnight term repurchase agreement:Day one: bank borrows $5 billion from the Fed; in exchange, the Fed receives a 3-year agency (Freddie Mac) bond as collateral - it could also be a 2-year Treasury note, but the dealer choose the former because it happened to be cheaper - never over-collateralizeEffect at the end of day one: bank’s cash position (“reserve”) in its reserve account at the Fed increases by $5 billion; Fed balance sheet increases as notional value of the 3-year Freddie Mac bond is added to the portfolioDay two: bank returns $5 billion plus interest to the Fed; the Fed returns the 3-year Freddie Mac bond to the bank (the bank “repurchases” the bond from the Fed)Effect at the end of day two: bank reserve decreases by $5 billion, the Fed’s balance sheet shrinks as the bond (loan collateral) is returned to the bankNo new funds are permanently injected into the financial system. Size of Fed’s balance sheet unchanged once the bonds are “repurchased” by the borrower.This is a classic example of sterilized intervention - the monetary base did not expand nor shrink. The added liquidity temporarily allowed the bank to meet its obligations before “returned to the source” at the Fed (a ledger entry that can be “zeroed out”).Permanent reserve creation via quantitative easingQE programs permanently expands the monetary base as the central bank creates new bank reserves to buy bonds from the banks. A typical QE operation follows a set process:The central bank announces the type of bonds it would buy; some central banks would also announce the specific size of purchase, as well as precise timing of when the operation will take placeNew cash ledger entries are created at the central bank’s account, and the central bank buys assets with specified characteristics (whether it is nominal government bond, MBS, or in the case of ECB, corporate bonds, and in the case of Bank of Japan, equity ETFs); in the case of Federal Reserve, it would mainly be Treasuries of specified maturity range, as well as specified MBS of a given duration (30 or 15-year) and given issuers (Fannie, Freddie, Ginnie)In case of the Fed, it buys the specified bonds from primary dealers. Bonds go on Fed’s balance sheet, the Fed credits primary dealers’ account at the Fed (reserve accounts) with the newly created cash; all cash held in these accounts are “bank reserves,” and this act creates new reserves in the banking systemThe Fed (and most other central banks) have announced policy guidance of keeping these bonds on balance sheet until maturity, and principal from matured bonds would be used to buy new bonds to prevent bond holdings from shrinkingCommercial banks would use their “bank reserves” in the reserve account at the Fed to buy banknotes when their physical cash reserves run low. The Fed debits the bank’s account at the Fed, and the bank receives additional banknotes from its regional Federal Reserve Bank (such as San Francisco Fed’s Los Angeles branch). This is one of the direct links between QE and “main street” finance.Because bonds from both repo and QE operations are held on Fed’s balance sheet (the former being “temporary,” and the latter “permanent”), it is common for markets to look at the rise in Fed balance sheet (size of bond holdings) to confuse one for another. In recent days, the size of Fed balance sheet has once again expanded:ConclusionOvernight and term repurchase agreements are “policy neutral” temporary maintenance operations designed to keep the system supplied with liquidity when needed; quantitative easing programs are “policy easing” stimulus operations designed to permanently expand the supply of liquidity in the market to achieve policy objectives.