When a transaction is accompanied by large financing, the parties agree on ways to transfer funds. If the amount is too large, it can be divided into several parts. In this case, each of the transfers will be called a «tranche». This concept is often found in the investment and banking sector.
1. What is a tranche in simple words
Tranche (English «tranche») is a part of a large amount of money that is transferred from one person to another. Often, this is a share of the debt or loan. The concept can be encountered in the course of studying the investment details of companies.
The financial assistance provided by the IMF to countries is also called a tranche.
Literally translated from French, the word «tranche» means «part» or «share». Speaking about the investment sphere, the term means a component, a share of securities or bonds that appeared on the market to improve its conjuncture. A tranche is a part of a specific amount of securities or cash, which is gradually transferred to the borrower on the terms of a previously signed agreement.
But, it is worth considering that each of these parts can be provided on individual terms. First of all, this concerns the terms of provision, the procedure for payments and possible risks. As a rule, a tranche is part of a credit or investment loan. At the same time, in different areas of the economy, other definitions can be applied to this term.
During the conclusion of a tranche transaction, the contract should indicate that the transfer of the entire amount will be carried out in several stages. If it is loan funds, the first tranche is often larger than the rest. It is also necessary to have a condition that there will be more than two such transfers. Most often, the concept of «tranche» is used in the context of money transfers.
2. Terms of the tranche
There are a number of conditions and requirements that must be met in order for a cash transfer scheme to qualify as a tranche, namely:
- The amount of each of the transfers may be different, while the conditions for providing each of the amounts are not necessarily the same.
- The contract contains conditions that describe in detail the terms and specific amounts of transfers.
- One of the main conditions is that the full amount will be provided after more than two transfers. If, according to the agreement, there are fewer of them, the transaction cannot be recognized as a tranche.
At the moment, the law does not regulate the relationship between the parties who enter into a tranche deal. Therefore, the main document on which the subjects must rely is the contract. During the negotiations, each of the nuances of financial settlements should be defined in detail.
3. Credit tranche
A loan tranche is the portion of a loan transferred from a financial institution to a borrower. Often, the borrowers in this case are representatives of large or medium-sized businesses. The key parameters of the loan tranche include the following:
- the possibility of providing foreign currency or ruble loans;
- the interest rate is not necessarily the same for each of the tranches. According to the contract, it can be fixed or floating;
- the accrual of the overpayment begins as soon as the borrower actually receives the loan, and not after the signing of the contract and the approval of a specific amount;
- The percentage of loan coverage by collateral is set on individual terms.
Regarding the form of issue, this is not a revolving or revolving line of credit. The latter option is characterized by the approval of a specific loan amount, for example, 4 million rubles. After the first tranche of 1.6 million rubles is transferred, the client will pay 600,000 rubles. Thus, the allowable limit will be 3.6 million rubles (4 million — 1 million + 600,000).
Regarding the non-revolving line of credit, the borrower will receive the borrowed funds in stages, without increasing the available limit. Each of the payments received from the borrower will be used to repay the loan. This form of relationship is beneficial to both the lender and the borrower. If the bank finds such a client, its risks will be reduced, since the money is transferred in installments, and the borrower, after receiving a positive response, can use the funds as needed.
Almost every bank opens credit lines. By choosing a specific lender, the owner of a large or medium-sized business can take a loan in several or in one currency of interest to him. Options are available without security, on bail, for a long or short term. The terms of such financing will be individual, depending on the goals, success and type of business.
Each of the loan conditions will be carefully considered during the meeting. Sometimes, the client can determine the purpose of spending money on his own, they are as follows:
- OS acquisition;
- contract financing;
- increase in working capital;
- refinancing of the loan portfolio;
- modernization of production.
If it is a small business, it is recommended to use a revolving line of credit. The loan amount in this case can range from 500,000 to 10 million rubles, depending on the lender. Conditions are sometimes revised depending on the turnover. The maximum term for issuing a tranche is six months. After the full amount is received, part of the funds can be used to pay interest, and the rest will resume the credit limit. In most cases, the purpose of opening a line of credit is to replenish working capital.
4. What is the benefit for the borrower
A tranche deal with a lender has several significant benefits that the borrower will experience, namely:
- There is such a variant of the conditions under which the rate applied during the consideration of the application will be set for the full crediting period. Thus, each of the tranches will be tied to this particular rate.
- The process of granting borrowed funds is greatly simplified. Providing a package of documents and signing the contract takes place during one meeting.
- Interest is charged only on the amount that is reflected in the borrower’s account (that is, on the loan actually issued) throughout the entire loan period.
5. Starting a credit line
The procedure for obtaining a loan begins with the submission of an application to the selected financial institution. After the application is submitted, the client will be provided with a list of documents that the lender will need to verify the reliability of the future borrower. During this procedure, employees of a financial institution analyze and find out the following:
- whether the borrower can provide any movable or immovable property as collateral;
- whether issuance of a loan in general is expedient;
- whether the borrower’s stable financial condition is sufficient to successfully repay the loan.
The bank will make a decision only after it has assessed the liquidity of the collateral and made a thorough economic analysis of the individual entrepreneur or enterprise of the borrower.
6. Tranches from the IMF
The International Monetary Fund is an organization that works under the UN. The main office of the IMF is in Washington. The organization began its work in 1947. It is a global company with sufficient resources to provide financial assistance to countries. France became the first country to take out a loan through the IMF.
Currently, the IMF is working with 188 countries around the world. You can apply to the fund in order to take a loan for a short or long term. States that temporarily suffer a shortage of funds apply here. But, economists often criticize the IMF’s policy towards certain countries. Many of them are convinced that the agreements concluded with the IMF harm the independence of such states and do not allow the economy to reach a high level.
In other words, the country becomes dependent on the IMF. The Monetary Fund issues funds for a period of 2 to 3 years. To receive money, the state provides a report on how soon and in what ways it will deal with the financial problems that have arisen. In the evaluation process, the International Monetary Fund will take into account the state’s international reserves, GDP and economic transparency.
If the provided strategy for overcoming the crisis suits the IMF, the state will receive the first part of the amount. Its volume cannot exceed a quarter of the quota of fund participants. To receive subsequent tranches, the state must fulfill a number of conditions. One of them is the improvement of the economy. First of all, it refers to specific economic reforms that will increase the level of well-being of citizens.
However, not all countries manage to achieve such a positive effect. In most cases, the loan amount is divided into four parts. regarding the purpose, term and procedure for issuance, they are fixed by the contract. The recipient may be required to comply with not only economic, but also political conditions. If any of the conditions are violated, the state runs the risk of not receiving the rest of the loan.
In 1992, the International Monetary Fund prepared an assistance program for Russia. According to this program, it was necessary to create a fund in order to stabilize the ruble. This was necessary to support him in the foreign exchange market. In addition, the fund was supposed to issue a $3 billion loan to the state to cover the monetary deficit. The first tranche was sent to the Russian Federation in August 1992.
The amount was 1 billion dollars and was provided for a period of 5 months. The IMF put forward the condition that the government must keep the budget deficit to 5% of GDP, and inflation will not exceed 10%. As a result, the country’s leadership failed to fulfill these conditions, so the remaining tranches were never transferred. The obligations to the International Monetary Fund were closed in 2005, and no new transactions were concluded.
A tranche is part of a large amount provided on the terms of a loan, investment or other agreement. This form of transfer of funds is beneficial for both the sender and the recipient. For example, a lender in this way can significantly reduce the risk of non-repayment of funds issued. The borrower, in turn, must clearly know which repayment terms will be more acceptable to him. To do this, it is recommended to negotiate with several financial institutions.