Bullets, ratchets and balloons

It took us 50-plus episodes of ‘A Dictionary of Finance’ podcast to realize we haven’t covered some of the very basics: terminology surrounding loans, our bread and butter.

So, Matt morphed into a sock-tycoon trying to get a loan from the European Investment Bank, with Allar acting as his not-so-knowledgeable lawyer. Explaining the loan terms are Garbiela Barufi, EIB loan officer for corporates in Iberia, and Martin Arnold, head of unit for corporate lending in the region. They help us come to terms with the following:

Tenor of a loan. Turns out it’s the same as maturity and refers to when the loan needs to be paid back.

Grace period. Typically immediately after the loan has been drawn down or disbursed, when the borrower does not need to make payments yet. It’s so the borrower can start making money on the investment first. 

Availability period.  When the loan is available for the borrower. This period can even be extended, usually for a fee.

We also cover secured and unsecured loans, senior and subordinated loans. We learn about floating and fixed interest rates, about EURIBOR, the disgraced LIBOR and SONIA (Sterling Overnight Index Average) which is relevant as the EIB has just issued a first bond linked to the SONIA benchmark.

We also learn about the pricing grid or pricing ratchet, in which the price of a loan is linked to a metric of the company’s performance, meaning that the cost of the loan can go up or down based on how the company is doing.

And then we discuss repayment profiles, such as balloon, bullet, sculpted etc. We’ll go over the differences of repayment schedules, meaning when do you have to repay how much, exactly. We also discuss which profiles might be more suitable for which kind of businesses.

The balloon, for example, doesn’t refer to either the borrower or the bank going bust, at all! Instead, it means the repayments are small in the beginning, and balloon towards the end.

And the bullet refers to the silver bullet, meaning it’s a loan that is the answer to all of your problems. No, just kidding, please consult a qualified expert before making any financial decisions, and remember, Matt and Allar are only (barely) qualified to be doing this podcast.

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