I was going through the Annual report of TCPL packaging and found loans in foreign currency and interest rate is listed as LIBOR + 200 basis points. Can someone please help me to understand, when and from where can a company avail such loans.
Company has imported machinery in past from EU . Is it to fund these imports ?
The company has most likely availed External Commercial Borrowing. You can read more about such loans and the regulations around them from the RBI website.
Were these Foreign Currency Bonds? If not and they were bank loans instead, then they can be of two types:
a. Packing Credit: Given as an advance to an exporter by a bank, in USD terms, for the amount of export order received by him. Once he receives his payment in USD, he can pay back the bank in USD itself, with the LIBOR based interest added (no currency risk and hence the most powerful form of working capital loan for an exporter).
b. Foreign Currency Term Loan: Very rarely would you come across this type of loan. Given in smaller quantities typically, by foreign banks who can raise foreign currency loans from their parents abroad. However, an exporter would be lucky to get LIBOR+200 bps as the rate of interest on such a loan.
Thanks @ankitkhemka7 and @abhisheksaha. Looks like it can be an ECB in the form of buyers credit as the company is importing machines from EU.
Below is what I found on Wikipedia
Buyer credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importer’s bank. For this service the importer’s bank or buyer’s credit consultant charges a fee called an arrangement fee.
Buyer’s credit helps local importers gain access to cheaper foreign funds that may be closer to LIBOR rates as against local sources of funding which are more costly.
Buyer’s Credit as a sub limit of term loan can be given for a period of maximum 5 years. 95% of the time the tenure won’t be higher than 3 years. Cost for such is Libor plus .110bps to 140 bps
Buyer’s Credit is also given as a sublimit of Working Capital. Cost can be as low as Libor plus 35 bps
European Commercial Borrowing (ECB) tenure can be as per requirement. Cost can be from Libor plus 150bps to 550 bps
There is something called ECA, it is a type of ECB only. Cost of ECA is less than that of ECB. But ECA can’t be given to each and every company.