What is a Revolving Underwriting Facility (RUF)?
A Revolving Underwriting Facility (RUF) is a form of revolving credit in which a group of subscribers undertakes to provide loans if a borrower is unable to sell on the Eurocurrency market. The Eurocurrency market is a market where lending currencies are held as deposits in banks outside countries that issue that currency as legal tender.
Key points to remember
- A Revolving Underwriting Facility (RUF) involves a group of underwriters who make loans to borrowers who are unable to sell in the Eurocurrency market.
- The issuing bank undertakes to buy the unsold euro banknotes at a predetermined price agreed by both parties at the time of the contract.
- Loans facilitated by a Revolving Guarantee Facility (RUF), provided by the purchase of short-term euro notes, have a maturity of six months or less.
- A single bank will generally manage the revolving credit aspect of this agreement, acting as arranger.
How a Revolving Underwriting Facility (RUF) Works
A revolving subscription facility (RUF) is a credit-granting entity that agrees to purchase unsold euro banknotes from a borrower at a pre-determined price agreed upon by both parties at the time of the contract. This credit line provides an additional level of security for those who want to buy and borrow in the Eurocurrency marketwhich operates in many global financial centers around the world, not just in Europe.
The facilitation of the RUF loan is done through an agreement between the borrower and an underwriting bank. The issuing bank presents the borrower with a fallback possibility if he cannot sell his euro banknotes. In this case, the borrower would only owe interest on the borrowed amount.
Loans facilitated by a Revolving Guarantee Facility (RUF), provided by the purchase of short-term euro notes, have a maturity (or redemption date) of six months or less.
A single bank will generally manage the revolving credit aspect of this agreement, acting as arranger. As an arranger, they play a marketing role in the sale of euro banknotes, while also assuming a small part of the funding— usually less than 10%.
Benefits of a Revolving Underwriting Facility (RUF)
Many of the same aspects of the Eurocurrency market that make it so exciting and attractive to borrowers and investors are also the elements that can present an increased level of risk.
The primary benefit of a revolving underwriting facility is the ability to circumvent regulatory requirements, tax laws and interest rate caps often involved in domestic banking. Since the Eurocurrency market is competitive and less regulated than that of the United States, it can simultaneously offer lower interest rates to borrowers and higher interest rates to lenders.
On the other hand, less regulation also comes with increased risks, especially during a run on the banks. This uncertainty is precisely what makes Revolving Underwriting Facilities (RUFs) so attractive. In return for a fee, credit-granting entities can provide a valuable safety net, providing borrowers with support that would help them avoid, or at least minimize, some losses in the often unpredictable Eurocurrency market.
Revolving Underwriting Facility (RUF) vs. Note Issuance Facility (NIF)
A Revolving Underwriting Facility (RUF) and a ticketing facility (NIF) provide short and medium term credit on the Eurocurrency market. Where they mainly differ is that a NIF buys the outstanding banknotes that have not been sold within a specified time. emissionrather than offering loans.
NIFs were particularly important in the 1980s. Where they do not include the underwriting component offered by a Revolving Underwriting Facility (RUF), they are sometimes referred to as euro commercial paper (ECP).
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