Listings in the glossary are selected terms and names that appear frequently on our website or in our magazine. To access our service take a free trial today.
An interest rate swap in which the notional principal amount increases at a predetermined way over time.
A method of accounting in which revenue is recognised when earned and expenses are recognised when incurred without regard to the timing of cash receipts and expenditures (cf. cash accounting).
Interest earned but not collected. Interest earned, but not paid, since the latest payment date.
Advance payment guarantee
An arrangement whereby a person employing a contractor makes funds available to the contracting party for purchase of equipment and organisational expense necessary to get the construction under way.
A corporation which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with another corporation.
A firm that executes orders for or otherwise acts on behalf of another party (the principal) and is subject to its control and authority. The agent may receive a fee or a commission for its services.
An interest rate on a loan which includes the cost of compensating balances, commitment fees and any other charges.
The gradual reduction of any amount over a period of time. A general term which includes various specific practices such as depreciation depletion, write-off or intangibles, prepaid expenses, and deferred charges; or general reduction of loan principal. Gradual repayment of a debt over time. Repayment through the operation of a sinking or purchase fund.
An interest rate swap in which the notional principal amount decreases in a predetermined way over the life of the swap.
A level stream of cash flows for a limited number of years (cf. perpetuity).
A general term for transactions involving moving capital from one market to another, from one security to another or from one maturity to another, in the hope of realising a higher yield or capital gain. The simultaneous purchase and sale of the same commodity in two different markets in order to profit from price discrepancies between the markets.
Securities collateralised by a pool of assets. The process of creating securities backed by assets is referred to as asset securitisation.
A transfer of legal title.
An option with an exercise price equal to or near the current price of the stock of the underlying futures contract.
Average life is the weighted average of the maturities of a given loan.
Back-to-back letter of credit
A letter of credit issued on the strength of another letter of credit (backing credit). It is, in effect, an extension of the terms and conditions of the backing credit. To qualify as a back-to-back credit, the terms must be identical with those of the backing credit except for any or all of the following features: the beneficiary’s name; the account party; the amount, which cannot be more than that of the backing credit; the validity date; and the insurance amount.
Where a term loan is amortised in equal periodic installments except for the final payment, which is substantially larger than the other payments, the final payment is known as a balloon payment.
A contract or other feature of a project that is sufficiently robust for a bank to lend against.
A lender's base rate, or prime rate, is their fundamental reference rate of interest. It is reset as often as daily.
In the futures market, the difference between the cash price and the futures price.
The risk between two different instruments used to index the floating-rate side of a swap transaction.
An interest rate swap from one floating instrument into another floating instrument in the same currency, undertaken to eliminate or minimise basis risk.
A bond to ensure that a party awarded a contract will accept the award and perform the contract. A financial guarantee given in support of the obligation of a bidder to sign a contract if he is successful in his bid.
The syndicated portion of a loan typically from a multilateral lender or other loans from non-bank lenders.
A bond is a negotiable note or certificate which evidences indebtedness. Bonds are also referred to as notes or debentures. The term note usually implies a shorter maturity than bond. (See also Debenture.)
Build, own and operate concession.
Build, own, operate and transfer concession.
The value at which an item is reported in financial statements.
Book value of project
Assets minus liabilities.
Build, own and transfer concession.
Interim financing of one sort or another.
A term loan with periodic instalments of interest only with the entire principal due at the end of the term as a final payment. The final payment on a balloon loan is sometimes referred to as a bullet.
Another term for a repurchase agreement.
A contract sold for a price that gives the holder the right to buy from the writer of the option, over a specified period, something (referred to as the underlying) at a specified price.
A bond that the issuer has the right to redeem prior to maturity by paying some specified call price.
Capital appreciation bonds
Zero-coupon bonds sold at par or better.
Long-term expenditures for plant and equipment.
The financing mix of a firm. The more debt in relation to equity, the more financial leverage or gearing the firm is said to have.
Captive finance company
Finance company established by a parent company to provide financing of its manufactured goods or services.
An exception to a general rule or provision or covenant. Refers to a production payment carved out of a larger production payment, or a right to a specified share of production from a certain mineral property.
The number of days between the purchase of raw materials and the collection of sales proceeds for finished goods.
A measure of a company’s liquidity, consisting of net income plus non-cash expenditures (such as depreciation charges).
Collateralised bond obligation.
Collateralised loan obligation.
A plant which produces steam to generate electricity and residual steam or heat for other uses.
Committed loan facility
A legal commitment undertaken by a bank to lend to a customer. A line of credit.
Bonds with interest rates or par value tied to the price of a certain commodity.
A swap in which the exchange of payments by the counterparties is based on the value of a particular physical commodity such as oil.
Preconditions to a draw of funds under a credit facility. Meeting conditions precedent typically constitutes financial close on a transaction.
A contingent liability is a liability which may arise sometime in the future, may never arise and is dependent upon some factor other than the passage of time.
A commitment from a project sponsor to contribute additional equity in the event of, for instance, cost overruns.
Debt convertible to other equity or debt issues of the issuer upon the happening of certain events and/or at the option of the lender.
The annual rate of interest on the bond’s face value that a bond’s issuer promises to pay the bondholder. One of a series of actual certificates attached to a bond, each evidencing interest due on a payment date.
A loan covenant is agreement by a borrower to perform certain acts, such as the timely providing of financial statements, or to refrain from certain acts such as incurring further indebtedness beyond an agreed level.
Covered interest arbitrage
Investing dollars in an instrument denominated in a foreign currency and hedging the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.
Credit default swap
Simplest and most common type of credit derivative for transferring credit risk.
Cross-currency interest rate swap
A swap that combines the features of single currency interest rate swaps and currency swaps.
A swap in which the parties sell currencies to each other subject to an agreement to repurchase the same currency in the same amount, at the same exchange rate, and at a fixed date in the future.
Any liability which is payable within one year.
Current assets divided by current liabilities (a liquidity measure).
Design, Build, Finance, Operate.
An obligation secured by the general credit of the issuer rather than being backed by a specific lien on property.
The total amount of debt a company can prudently support, given its earnings expectations and equity base.
The ratio of a firm’s debt to its capitalisation. The higher this ratio, the greater the financial leverage and the risk.
The ratio of a firm’s debt to its equity. The higher this ratio, the greater the financial leverage of the firm.
Payments of principal and interest on a loan.
Failure to make timely payment of interest or principal on a debt security or to otherwise comply with provisions of a bond indenture or loan agreement.
In loans and leases and swaps, a substitution of a lump sum payment for the present value of a stream of payments.
Deferred tax liability
An estimated amount of future income taxes that may become payable from income already earned but not yet recognised for tax reporting purposes.
An agreement to guarantee revenues will be received or expenses paid to make up a shortfall needed to pay debt.
A term used in accounting and finance to indicate the actual paying out of cash.
A bond selling below par.
Non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value; for example, US Treasury bills.
Abbreviation for earnings before interest and taxes.
The excess of revenues over all related expenses for a given period of time. Sometimes used to describe income, net income, profit or net profit.
Net worth; assets minus liabilities. The stockholder’s residual ownership position.
A share of ownership interest in a company, project or property, or a potential ownership interest in a company, project or property in consideration for making a loan.
A term loan that renews automatically, usually year to year, unless specifically terminated by either party.
A renewal of a true lease at the end of the base term and any fixed renewal terms based on an appraisal of the value and remaining life that is made shortly before the conclusion of the fixed term and renewals.
An individual, corporation, or association, such as a bank or trust company, to whom certain property is given to hold in trust, according to the trust agreement.
Provides for a payment by an insurer to the policy beneficiary if a loss is incurred on a financial obligation insured, and the loss is attributable to a specified event that causes the default.
A capital lease. A financing device whereby a user can acquire use of an asset for most of its useful life. Rentals are net to the lessor; and the user is responsible for maintenance taxes and insurance. Rent payments over the life of the lease are sufficient to enable the lessor to recover the cost of equipment plus interest on its investment. A finance lease may be a true lease or a conditional sale.
First-in, first-out (FIFO)
A method of inventory accounting in which the oldest item in inventory is assumed to be sold first (as contrasted to last-in, first-out).
A guarantee that is measured by some percentage of the total liability. The guarantor suffers the first loss up to that amount.
A credit rating agency.
A currency whose official exchange value in terms of gold or other currencies is maintained by the central bank or monetary authority of the concerned country and does not vary. Although most exchange rates are now floating rates, they will usually fix them against the dollar.
Any security which promises an unvarying payment stream to holders over its life.
Fixed rate bond
A fixed rate bond pays the same rate of interest to investors throughout its life and has a final maturity date.
Fixed rate loan
A loan on which the rate paid by the borrower is fixed for the life of the loan.
A currency whose rate of exchange is allowed to fluctuate according to the forces of supply and demand. All currencies are subject to some degree of central bank intervention to soften the effects of market forces. Conversely, governments also manipulate their domestic economies to boost their currencies.
Floating interest rate
An interest rate which fluctuates during the term of a loan and which is adjusted upwards or downwards during the term of a loan in accordance with some index of short-term rates.
Floating rate notes
A floating rate note issue has no fixed rate of interest. The coupon is set periodically according to a predetermined formula tied to short-term interest rates in the appropriate market. Usually refers to floating rate notes issued in Europe, although all kinds of floating rate instruments are issued in the United States. The holder may have the right to demand redemption at par on specified dates.
An agreement between two parties whereby one party, for an upfront premium, agrees to compensate the other at designated times if the underlying (ie, a designated price or rate) is less than the strike level.
Foreign exchange (Forex)
The currency of foreign countries; and the process of converting the currency of one country to that of a second country.
Foreign exchange risk
The risk that a long or short position in a foreign currency will have to be closed out at a loss, due to an adverse movement in the relevant exchange rate. The long or short position which may arise out of a financial or commercial transaction.
Foreign tax credit
A credit against taxes in one country for taxes paid to another country on the same income.
Contract between two parties to exchange a currency at a set price on a future date. Differs from a futures contract in that most forward commitments are not actively traded or standardised and carry the risk from the creditworthiness of the other side of the transaction.
Forward rate agreement
A customised agreement between two parties (one of whom is a dealer firm – a commercial bank or investment banking firm) where the two parties agree at a specified future date to exchange an amount of money based on a reference interest rate and a notional principal amount.
An legal agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of something at a specified price at the end of a designated period of time. The price at which the parties agree to transact in the future is called the futures price. The designated date at which the parties must transact is called the settlement or delivery date.
A market in which contracts for future delivery of a commodity or a security are bought and sold. Different exchanges specialise in particular kinds of contracts. The exchange generally acts as a middleman, guaranteeing payment in case either buyer or seller defaults. In return, both sides of the trade put up collateral, which is adjusted daily, to back their obligations.
Generally Accepted Accounting Principles, also known as US GAAP. These are US standanrds and their harmonisation with the international standards, known as IFRS produced by IASB is an ongoing project of importance to project financiers.
Debt to equity ratio.
General obligation bond
Municipal securities secured by the issuer’s pledge of its full faith, credit and taxing power, as contracted to an industrial revenue bond which is dependent upon revenue generated by a particular facility.
A partnership in which all partners have unlimited liability for future.
The intangible assets of a firm, calculated at the excess purchase price paid over book value.
Now known as EULER HERMES Group, the credit insurance and trade and export finance agency for Germany.
A currency considered by the market to be likely to maintain its value against other currencies over a period of time and not likely to be eroded by inflation. A soft currency, on the other hand, is one whose value melts away as you hold it. Hard currencies are usually freely convertible. The most obvious hard currencies in recent times have been the US dollar, , yen, Swiss franc and sterling.
A method whereby currency exposure (the risk of possible loss due to currency fluctuations) or commodity exposure is covered or offset for a fixed period of time. This is accomplished by taking a position in futures equal and opposite to an existing or anticipated cash or commodity position, or by shorting a security similar to one in which a long position has been established.
A requirement that an obligation, such as rent payments, be carried out ‘come hell-or-high-water’. An unconditional, absolute obligation not subject to defence of non-performance by the other party to the contract.
International Finance Corporation, a subsidiary of the International Bank for Reconstruction and Development (World Bank).
An event or condition that, after the giving of notice or the lapse of time, or both, would become an event of default under a lease or a mortgage, entitling the lease to be terminated or the mortgage to be foreclosed.
A term used to describe the class of persons entitled to indemnification under the general indemnity and general tax indemnity provisions of an agreement.
When used in the context of a leveraged lease, an agreement whereby the owner participants and the lessee indemnify the trustees from liability as a result of ownership of the leased equipment.
Indenture of a bond
A legal statement spelling out the obligations of the bond issuer and the rights of the bondholder.
A loan with debt service repayment tied to some standard which is calculated to protect the lender against inflation and/or currency exchange risk.
Indexed rate notes
A note with the interest rate set at take-down on the basis of an agreed interest rate index.
Industrial development revenue bond
In the United States, a form of municipal revenue bond for financing certain types of projects where the interest paid is exempt from U.S. taxes. Also known as industrial revenue bond.
The increased return on a security or an investment which is required to compensate investors for expected inflation.
Investors such as banks, insurance companies, trusts, pension funds foundations and educational, charitable and religious institutions.
Bond whose payments depends on the occurrence of a credit event. Also knows as a catastrophe-linked bond.
Intangible assets include such items or accounts as: goodwill, patents and patent rights, deferred charges and unamortised bond premium.
An agreement between the lenders to a company as to the rights of creditors in the event of default, covering such topics as collateral, waiver, security and set-offs.
Cash amounts paid by borrowers to lenders for the use of their money. Normally expressed as a percentage.
Interest rate exposure
Risk of gain or loss to which a company is exposed due to possible changes in interest-rate levels.
Interest rate swap
A swap in which two parties agree to exchange interest rate payments based on a notional principal amount, with typically one paying a fixed rate and the other generally paying a floating rate.
Internally generated funds
Cash that a firm generates from retained earnings and depreciation.
A financial institution specialising in the original sale and subsequent trading of company securities, and private placements including management and underwriting of issues as well as securities trading and distribution. The main function of an investment bank is to locate and collect funds for clients so they can finance new investment projects. Investment banks engage in buying and selling securities, such as stocks, bonds and mortgages. Investment banks also act as intermediaries between the corporation, who requires funds for such improvements as new equipment, new buildings, or plant expansions; and the investor, who wishes to invest his savings. Investment banks may promote a new industry, handle the finances of a corporation for expansion purposes, or act as brokers with other investment banking firms in the flotation of stocks and bonds.
Internal rate of return.
Internal Revenue Service.
Investment tax credit.
Often used to describe any jointly owned corporation or partnership which owns, operates or constructs a facility project or enterprise. More specifically, an arrangement between two or more parties for the joint management or operation of a facility, project enterprise or company under an operating agreement which is not a partnership.
Bonds that have a credit rating that below investment grade.
A form of guarantee in which the guarantor agrees to keep the recipient of the guarantee well, by injecting capital as needed. Sometimes called a maintenance of working capital guarantee. If properly worded, a keep well letter can be the equivalent to a formal guarantee.
Last-in, first-out (LIFO)
A method of inventory accounting in which the newest item in inventory is assumed to be sold first (cf. first-in, first-out).
The bank which negotiates a large loan with a borrower and solicits other lenders to join the syndicate making the loan.
In a new securities issue, the managing bank responsible for initiating the transaction with the borrower and for organising (or designating another to organise) the successful syndication and placement of the issue in the primary market.
These are tables which chart the amount of new issue business each bank in the Eurobond market has done. Banks believe that the higher they rank in the league tables and particularly the table of Lead Managers running the books, the better the chance they will have of winning new mandates themselves. The aim of most participants in the bond market is to achieve Lead manager status.
In an equipment lease, one party, called the lessor, provides equipment to a second party, called the lessee, for a fixed period of time for compensation.
The equivalent simple annual interest rate implicit in minimum lease rentals. Not the same as interest rate implicit in a lease.
The fixed, non-cancellable term of the lease includes, for accounting purposes, all periods covered by fixed rate renewal options which, for economic reasons, appear likely to be exercised at the inception of the lease and for tax purposes, all periods covered by fixed rate renewal options.
The user of equipment being leased.
The owner of equipment which is being leased to a lessee or user.
Letter of credit
A guarantee limited as to time and amount.
A lease which meets the definition criteria for a direct financing lease, plus all of the following characteristics:
a. At least three parties are involved: a lessee, a lessor and a long-term creditor.
b. The financing provided by the creditor is substantial to the transaction and without recourse to the lessor.
c. The lessor’s net investment typically declines during the early periods of the lease and rises during the later periods of the lease.
An obligation to pay an amount or perform a service.
The London Interbank Offered Rate of interest on Eurodollar deposits traded between banks. There is a different Libor rate for each deposit maturity. Different banks may quote slightly different Libor rates because they use different reference banks.
A security interest on property to secure the repayment of debt and the performance of related obligations.
Limited liability company
A special purpose corporation formed under state laws which permit the entity to have the characteristics of a partnership.
A partnership consisting of one or more general partners, jointly and severally responsible as ordinary partners, by whom a business is conducted; and one or more limited partners, contributing in cash payments a specific sum as capital and who are not liable for the debts of the partnership beyond the funds so contributed.
Line of credit
A commitment of a bank to a borrower to extend a series of credits to the borrower under certain terms and conditions up to an agreed maximum amount for a specified period of time. In addition to loans of funds, a line of credit may include issuance of a succession of letters of credit, acceptances and/or discounting of a series of drafts, extension of multiple loans or advances and other forms of credit. The amount of credit, as well as the conditions under which it is provided, is established by agreement.
A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.
The process of closing down a company, selling its assets, paying off its creditors and distributing any remaining cash to owners.
Any ratio used to estimate a company’s liquidity (such as the acid test or current ratio).
A borrowing for a long period of time, usually through bank loans or the sale of bonds. On a balance sheet, any debt due for more than one year is classified as long term.
Factors that pertain to developments in the general economy and government fiscal policy.
Modified accelerated cost recovery system. Tax depreciation permitted by the IRS. MACRS replaced ACRS.
A bond to provide funds for maintenance and repair of equipment or a facility. Maintenance bonds are used in connection with construction contracts to ensure that a contractor will repair mistakes and defects after completion of construction. The bond may be used in lieu of the contractor leaving a portion of the contract price on deposit with the employer to ensure performance.
Where a product contracted to be supplied cannot be provided from a certain project, a make-up agreement provides that the product will be supplied from some other source controlled by the sponsor.
Authorisation from a borrower to proceed with arranging a financing.
Marginal cost of capital
The incremental cost of financing above a previous level.
The price at which an item can be sold.
The date on which a given debt security or any obligation to pay money becomes due and payable to the holder in full.
A debt instrument with the unique characteristic that notes are offered continuously to investors by an agent of the issuer. Investors can select from several maturity ranges: nine months to one year, more than one year to 18 months, more than 18 months to two years and so on up to 30 years. In the United States, medium-term notes are registered with the Securities and Exchange Commission under Rule 415 (the shelf registration rule) which gives a corporation the maximum flexibility for issuing securities on a continuous basis.
A form of structured subordinated loan transaction, usually with an equity kicker offered in order to get better terms from investors and carrying a higher interest rate to reflect the greater risk..
Monte Carlo Analysis
A statistical techniqe used in project modelling whereby repeated random sampling of one of the variable in a project's financial model and an examination of the effect of those changes on NPV or IRR offers decision makers a view on the project's sensitivity to changes in a particular variable and thence insights into risk management policies and hedging decisions.
A credit rating agency.
A pledge or assignment of security of particular property for payment of debt or performance of some other obligation. The same as an indenture of trust or security agreement.
Multinational lending agencies
A number of trade support organisations are jointly owned by a group of countries and are designed to promote international and regional economic cooperation. In particular, these lending agencies have such goals as aiding the development of productive facilities and furthering social and economic growth in member countries. These include the following major multinational agencies:
• Asian Development Bank;
• European Banks for Reconstruction and Development
• Inter-American Development Bank;
• International Bank for Reconstruction and Development (The World Bank); and
• International Finance Corporation (IFC).
Municipal (muni) notes
Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.
The net cost incurred when the cost of carry exceeds the yield on the securities being financed.
Undertaking by a borrower not to offer improved security arrangements to other lenders without offering the equivalent security to the instant lender.
Any written evidence of a payment obligation which may be transferred by endorsement or by delivery, such as checks, bills of exchange, drafts, promissory notes and some types of bonds or securities and of which the transferee may become a holder in due course.
Net present value (NPV)
Present value of cash inflows less present value of cash outflows.
A stated rate which is usually subdivided for compounding purposes, resulting in a higher effective rate.
A loan on which interest or some payment due under the loan agreement is not paid as it accrues. Since banks are examined only periodically, a non-performing loan may or may not be classified.
Debt without recourse to the sponsor of a project. Lender looks to the project or other interested parties for repayment.
An instrument recognised as a legal evidence of a debt that is signed by the maker, promising to pay a certain sum of money, on a specified date, at a certain place of business, to the payee or other holder of the note. The difference, if any, between notes and bonds is normally that of maturity, notes having a shorter life. Coupon issues with a relatively short original maturity are often called notes. However, US Treasury notes are coupon securities that have an original maturity of up to 10 years.
Osterreichische Kontrollbank AD. The export credit agency for Austria.
The product produced by a project.
Also called a Prospectus. The offering circular usually contains a complete description of the terms of the securities being offered, together with financial information relating to the borrower and any guarantor.
The complete description of the transaction under discussion that forms the basis of an invitation to providers of debt or equity capital, so including terms of the securities being offered, together with financial information relating to the borrower and any guarantor. The sponsors are responsible for the accuracy of the contents of the offering memorandum.
The user taking the product produced by a project. The term is often used in connection with take-or-pay contract.
Operations and maintenance agreement
Agreement between project company and outside contractor obliging that contractor to operate and maintain a project.
For financial accounting purposes, a lease which does not meet the criteria of a capital lease and does not have to be shown on the balance sheet by the lessee, although it will be reported in a footnote as a fixed charge. The term operating lease is also, used generally to describe a short-term lease whereby a user can acquire use of an asset for a fraction of the useful life of the asset. The lessor in such a lease may provide services in connection with an operating lease such as maintenance, insurance and payment of personal property taxes. This treatmetnt may be subject to change likely to disappear under the new international accountig standards.
The cost of pursuing one course of action measured in terms of the forgone return offered by the most-attractive alternative investment.
A contract in which the writer of the option grants the buyer of the option the right, but not the obligation, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date). The writer, also referred to as the seller, grants this right to the buyer in exchange for a certain sum of money, which is called the option price or option premium. The price at which the asset may be bought or sold is called the strike or exercise price. The date after which an option is void is called the expiration date.
Overseas Private Investment Corporation (OPIC)
A self-supporting US government corporation providing insurance and, in some cases, partial financing to US private investment in developing countries. In eligible countries, its insurance services provide political risk insurance to US investors for new capital investment and its financial services provide direct loans to new US investment projects. Medium-term and long-term loan guarantees are provided for the same projects. Criteria for financing state that the project must have at least 51 per cent private ownership and 25 per cent US ownership.
The principal amount at which the issuer of a debt security contracts to redeem that security at maturity. The face value.
Instruments which rank equally in right of payment with each other and with other instruments of the same issuer.
A voluntary contract between two or more persons to place their money, efforts, labour and skill in lawful commerce or business with the understanding that there shall be a proportional sharing of profits and losses between them.
A business entity by two or more persons (or corporations) and conducted for a profit.
The amount of time required to recover the initial investment in a project.
A bond supplied by one party to protect another against loss in the event of default of an existing contract, usually to motivate a contractor to perform a contract. Some performance bonds require satisfactory completion of the contract. Other performance bonds provide for payment of a sum of money for failure of the contractor to perform under a contract.
An annuity forever; periodic equal payments or receipts on a continuous basis.
A bank depositing Eurodollars with or selling Eurodollars to another bank is often said to be making a placement.
100 basis points is equal to 1 per cent. However, 1 per cent of the face value of a note or bond is also called a point.
A kind of equity whose owners are given certain privileges over common stockholders, such as a prior claim on the assets of the firm.
Preferred stockholders may have no voting rights and are usually paid a fixed dividend.
A bond selling above par. (Also refers to a long-running UK state-backed prize draw scheme.)
A payment made ahead of the scheduled payment date.
The current equivalent value of cash available immediately for payment or a stream of payments to be received at various times in the future. The present value will vary with the discount interest factor applied to future payments. The current value of a given future cash flow stream, discounted at a given rate.
The rate at which banks lend to their best (prime) customers. The all-in cost of a bank loan to a prime credit equals the prime rate plus the cost of holding compensating balances.
A sum on which interest accrues. Capital, as distinguished from income. Par value or face amount of a loan, exclusive of any premium or interest. The basis for interest computations. Another definition of a principal is a person who acts for his own account.
Private Export Funding Corporation (PEFCO)
This corporation, in conjunction with US commercial banks and the Eximbank, provides a source of private capital for US exporting ventures. It was established for the purpose of mobilising non-bank funds for medium- and long-term loans to borrowers outside the United States for the purchase of US goods and services. PEFCO makes loans only when facilities are not available from traditional private sector sources on normal commercial terms and at competitive rates of interest. Accordingly, PEFCO extends loans with maturities that are longer than those available from US commercial banks; the loans are guaranteed fully by the Eximbank.
The raising of capital for a business through the sale of securities to a limited number of well-informed investors rather than through a public offering. In the United States a private placement is a debt or securities issue offered to a limited number of sophisticated investors and not subject to the registration requirements of the US Securities Act 1933.
A mineral production payment is a right to a specified share of the production from a certain mineral property (or a sum of money in place of production). The payment is secured by an interest in the minerals in place. Payment is dischargeable only out of runs of oil or deliveries of gas or minerals accruing to certain property charged with the production payment. It cannot be satisfied out of other production. The right to the production is for a period of time shorter than the expected life of the property. A production payment usually bears interest payable out of future production for payment.
Production payment loan
A loan secured by a production payment.
Project, as used in the term project financing
An economic unit capable of generating sufficient cash flow to conservatively cover operating costs and debt service for financing the project over a reasonable time period which is less than the economic life of the asset.
Also called a offering circular. The offering circular contains a complete description of a loan offering or securities issue, including a complete statement of the terms of the issue and a description of the issuer, as well as its historical and latest financial statements. A prospectus for a public offering must be filed (in the US) with the SEC prior to the sale of a new issue.
Put option (generally)
A contract sold for a price that gives the holder the right to sell to the writer of the contract, over a specified period, a specified property or amount of securities at a specified price.
See supply-or-pay contract.
An evaluation given by Moody’s, Standard & Poor’s, Fitch or other rating services as to a security’s credit worthiness.
Agencies that study the financial status of a company and then assign a quality rating to securities issued by that firm. Standard and Poor’s, Moody’s and Fitch are the leading rating agencies that will rate project finance debt.
Repaying existing debt and entering into a new loan, typically to meet some corporate objective such as the lengthening of maturity or lowering the interest rate.
Redemption of securities by funds raised through the sale of a new issue.
A transfer of funds from one place to another. A remittance may be any payment in full or in part on a debt or obligation. However, a remittance need not be payment of an obligation.
Residual or residual value
In a lease, the value of equipment at the conclusion of the lease term. To qualify as a true lease for tax purposes, residual value at the end of the lease term is usually expected to equal 20 per cent of the original cost.
Earned surplus. The amount of earnings retained and reinvested in a business and not distributed to stockholders as dividends.
Retention money bonds
A portion of the payments due under a construction contract are sometimes to be retained by the employer to cover costs of repair of unforeseen defects. The contractor can receive those payments immediately by furnishing the employer a bond for such payments.
A formal and official increase in the exchange rate of a currency that is made unilaterally by a country or through the International Monetary Fund.
A municipal bond issued by a political subdivision of state or local government and secured by revenue from tolls, user charges, or rents derived from the facility financed. Municipal revenue bonds are not backed by the tax base or other assets of the municipality.
Revolving credit agreement
A legal commitment on the part of a bank to extend credit up to a maximum amount for a definite term. The notes evidencing debt are short-term, such as 90 days. As notes become due, the borrower can renew the notes, borrow a smaller amount or borrow amounts up to the specified maximum throughout the term of commitment. The borrower is usually required to maintain compensating balances against the commitment and pay a commitment fee on the average unused portion of the revolving credit. The term of a revolving credit agreement is generally for two years or longer. A revolving credit agreement is regarded as an intermediate loan.
Instability; uncertainty about the future; more specifically, the degree of uncertainty involved with a loan or investment.
Risk adjusted discount rate
A discount rate which includes a premium for risk.
Risk-free interest rate
The interest rate prevailing on a default-free bond in the absence of inflation.
An additional required rate of return that must be paid to investors who invest in risky investments to compensate for the risk.
A rule adopted by the US Securities and Exchange Commission in April 1990, that eliminates the two-year holding period of privately placed securities by permitting large institutions to trade such securities among themselves without having to register them with the SEC.
Running the books, or book-runner
The manager who has total control over an offering (usually appears on the upper left of the list of underwriters in a tombstone advertisement).
Sezione Speciale per l’Assicurazione del Credito all’Esportazione. The export credit finance agency for Italy.
Sale and leaseback
A transaction in which an investor purchases assets from the owner and then leases such assets back to the same person. The lessee receives the sale price (and can return it to his capital) and continues to enjoy the use of the assets.
The estimated selling price of an asset once it has been fully depreciated.
After the initial distribution of bonds or securities, secondary market trading begins. New issue houses usually make a market in bonds or securities which they have co-managed. Other institutions, such as banks, investment banks and securities trading firms, generally act as market makers in a wide range of issues and instruments by quoting two-way prices and being prepared to deal at those prices.
A creditor whose obligation is backed by the pledge of some asset. In liquidation, the secured creditor receives the cash from the sale of the pledged asset to the extent of the amount of the loan.
Process of (1) pooling of assets; (2) creating different bond classes that are backed by the pool of assets; and (3) de-linking of the credit risk of the pool of assets from the credit risk of the originator.
An agreement in which title to property is held as collateral under a financing agreement, usually by a trustee.
Any creditor with a claim on income or assets prior to that of general creditors.
Senior debt is generally defined as all debt, both short- and long-term, which is not subordinated to any other liability. This debt includes obligations to banks (revolving credit lines or term loans), to insurance companies and to other financial institutions. Rentals under leases are senior debt. In addition, most current liabilities such as account payable, accrued expenses and taxes payable are usually considered senior debt. If the financial statements do not specify whether the debt is senior or subordinated, conservative practice is to assume it is senior.
Analysis of impact on an economic analysis, plan or forecast of a change in one of the input variables.
A bond issue in which maturities are staggered over a number of years.
The book value of the net assets (total assets less total liabilities) is called shareholders’ equity, or net worth. Accounts which comprise net worth are preferred stock, common stock, paid-in capital and earned surplus (retained earnings). Deferred accounts and reserve accounts such as reserve for pensions, while generally not thought of as true liabilities, are not considered equity.
A market participant assumes a short position by selling a commodity or security he does not own.
An obligation maturing in less than one year.
The charge for the loan of money or for a deferment of the collection of an account, computed by applying a rate (of interest) against the amount of the loan or account. Contrasts with compound interest in that only the principal earns interest for the entire life of the transaction.
Same as direct lease or direct financing lease.
A reserve or a sinking fund established or set aside for the purpose or payment of a liability anticipated to become due at a later date. Indentures on corporate issues often require that the issuer make annual payments to a sinking fund, the proceeds of which are used to retire randomly selected bonds in the issue. Another type of sinking fund permits the issuer to retire the bond by a market purchase.
The state of being able to pay debts as they come due.
Sources and uses statement
A document showing where a company got its cash and where it spent the cash over a specific period of time. It is constructed by segregating all changes in balance sheet accounts into those that provided cash and those that consumed cash.
The special risk, if any, that attaches to an investment or loan because the borrower’s country of residence differs from that of the investor’s. Also referred to as country risk.
Acronym for special purpose entity, such as a trust, special purpose corporation, or limited liability company, formed for the purpose of holding title or acting as a conduit of funds. An SPE is thought to provide protection to lenders in the event of bankruptcy of the sponsor or lessor. Same as an SPV or special purpose vehicle.
Special drawing rights
SDR. The currency of the International Monetary Fund (IMF) which is used to settle international balances; it represents a composite of five currencies weighted according to each country’s share of world exports.
Special purpose corporation
An independent corporation with nominal capital which is a party to a project financing for purposes of holding title as a nominee or acting as a conduit of funds.
Special purpose property
Property that is uniquely valuable to the user and is not valuable to anyone else except as scrap. A lease of special-purpose property will not qualify as a true lease because the lessee controls the residual value. Also referred to as limited use property.
Special purpose vehicle.
A party interested in supporting a project financing. A party providing the credit to support a project financing.
The market for buying and selling a specific commodity, foreign currency or asset at the current price for immediate delivery. Markets in which goods, currencies, assets or commodities are sold for cash and delivered immediately, except in the spot market for foreign exchange, settlement is two business days ahead. Trades that occur in futures contracts expiring in the current month are also called spot market trades. The spot market tends to be conducted over-the-counter (via telephone trading) rather than on the floor of an organised commodity exchange. Known also as actual market, cash market or physical market.
Standard & Poor’s
A credit rating agency.
The price at which an option to purchase can be exercised.
A creditor holding a debenture having a lower priority of payment than other liabilities of the firm.
Holders of this issue rank after those of holders of various other unsecured debts incurred by the issuer.
All debt (both short- and long-term) which, by agreement, is subordinated to senior debt. It does not include reserve accounts or deferred credits.
A contract under which a supplier agrees to supply a raw material, product or service for a certain price to a stated period and agrees to pay for an alternative supply if it cannot perform.
Contract whereby two parties agree to exchange periodic payments. The dollar amount of the payments exchanged is based on a notional principal amount. There are four types of swaps: currency swaps, interest rate swaps, commodity swaps and equity swaps. (See also exotic options.)
Used in a global note facility or bonus to allow the issuer to move from the US commercial paper market to the Euronote market. Typically available for a maximum of seven days and priced in relation to US prime.
Sometimes used as a synonym for a swap; for example, buying a currency spot and selling it forward.
A commercial banking transaction in which two or more banks participate in making a loan to a borrower. Interest is typically paid on a floating rate basis linked to short-term interest rates in a particular currency.
An equipment lease that qualifies as an off-balance sheet operating lease for financial accounting purposes but as a loan or conditional sale for tax purposes, thus enabling the lessee to retain tax benefits associated with equipment ownership.
A take-and-pay contract is sometimes used to describe a contract in which payment is contingent upon delivery and the obligation to pay is not unconditional, as in a take-or-pay contract.
A take-or-pay contract is a long-term contract to make periodic payments over the life of the contract in certain minimum amounts as payments for a service or a product. The payments are in an amount sufficient to service the debt needed to finance the project which provides the services or the product and to pay operating expenses of the project. The obligation to make minimum payments is unconditional and must be paid whether or not the service or product is actually furnished or delivered.
Bonds issued by political subdivisions which bear interest exempt from US income tax.
A business loan with an original or final maturity of more than one year, repayable according to a specified schedule.
Parties to a through-put agreement commit to ship certain minimum quantities of oil, refined products or gas at a fixed rate through a pipeline. Certain quantities have to be shipped in each period, such as a month or a year, to provide the cash flow to meet operating expenses and debt service of the pipeline company. In the event the product is not shipped and the pipeline company has insufficient cash to meet is expenses and debt service, the parties to the through-put agreement are unconditionally obligated to contribute additional funds in proportion to ownership. The through-put contract is similar to a take-or-pay contract and serves as an indirect guarantee for a project financing of the pipeline. Through-put agreements are also used in connection with processing plants where some product is put through the plant.
Another name for take-or-pay contract.
An announcement placed in a financial newspaper or journal which announces a financing or performance of some financial service.
Total debt of tangible net worth ratio
Total debt (current debt, long-term senior and subordinated debt) ratio/net worth less intangible assets. The measure of the relative amounts invested in a company by creditors and owners. A high ratio in comparison to industry norms indicates a greater dependence on outside financing and an unwillingness of the owners to risk their own capital. At some point, the risks of operations will shift primarily to the creditors. Leases should be capitalised in accordance with FAS 13 in computing this ratio.
A bank or other third party which administers the provisions of a trust agreement. In financing transactions these provisions may relate to a loan.
An arrangement under which a financial house agrees to buy a certain agreed amount of securities of a new issue on a given date and at a given price, thereby assuring the issuer the full proceeds of the financing.
A financial firm engaged in the business of underwriting securities issues. A dealer who purchases new issues from the issuer and distributes them to investors. Underwriting is one function of an investment banker. In a Eurobond offering the Lead managers and Co-managers act as underwriters for the issue, taking on the risk of interest rates moving against them before they have placed the bonds. Additional banks may be invited to act as sub-underwriters, so forming a larger underwriting group.
A loan made on the general credit of a borrower. The lender relies upon the borrower’s balance sheet and the capability of the borrower’s management to manage its assets and produce cash flows sufficient to repay the debt. No assets are pledged.
Another name for a take-or-pay contract or throughput contract.
Loan made at an interest rate that fluctuates with the prime, Libor or some other index.
Financing offered by a manufacturer or dealer for its products.
Risk capital in the form of equity investments or equity related debt securities extended to start-up or small going concerns.
An instrument allowing the holder to purchase a given security at a given price; for either a set period or into perpetuity.
Working capital replenishment
An undertaking by an industrial company sponsor and/or parent to make liquid funds available to a special purpose subsidiary or company to enable such a company to keep its working capital at levels sufficient to service debt and meet operating expenses.
A foreign bond issued in the US market, payable in dollars and registered with the SEC.
Rate of return on a loan, expressed as a percent and annualised.
The relationship between yield and current maturity is depicted in graphic form as a yield curve. This curve plots yield on the vertical axis and maturity on the horizontal axis. A normal yield curve slopes upward from left to right, from short maturities to long maturities.
Yield to maturity
The rate of return yielded by a debt security held to maturity when both interest payments and the investor’s capital gain or loss on the security are taken into account.
A bond which does not pay interest. The security is sold at a discount and its yield interest rate is determined by a rise in value per unit of time. Its maturity value equals par.
Zero coupon bond with option to convert to common stock or other security.
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