Revolving Acceptance Facility by Tender: Financial Instrument for Acceptance Credits

Introduction

The Revolving Acceptance Facility by Tender (RAFT) is an underwritten facility from a bank that allows for the placement of sterling acceptance credits through a tender panel of eligible banks. This sophisticated financial tool facilitates corporate funding by providing access to short-term financing solutions.

1. Standard RAFT

This involves a single bank underwriting the facility, providing assurance of funds while allowing periodic tendering among a pre-approved panel of banks.

2. Multi-Bank RAFT

A syndicated version where multiple banks underwrite and participate in the tender process, spreading risk and increasing available credit.

Detailed Explanations

A RAFT works as follows:

• Underwriting: A bank (or consortium of banks) agrees to provide an underwritten credit facility to a corporate borrower.
• Tender Panel: A selected group of banks is invited to bid for acceptance credits periodically.
• Acceptance Credit: This involves the issuing bank guaranteeing payment on the borrower’s behalf, typically for trade-related transactions.

Mathematical Formulas/Models

The cost of funds in RAFT can be expressed as:

• \( R \) is the base rate (e.g., LIBOR)
• \( S \) is the spread based on the borrower’s credit risk

Importance

RAFT provides a reliable and flexible means of financing, enabling corporations to manage cash flow more effectively and reduce the cost of borrowing by leveraging competitive bidding.

Applicability

• Corporate Financing: Ideal for multinational corporations with regular short-term funding requirements.
• Trade Finance: Suitable for businesses involved in international trade needing secure and predictable cash flows.

Related Terms

• Acceptance Credit: A credit arrangement where a bank guarantees payment of a bill of exchange on behalf of its client.
• Tender Panel: A group of banks invited to submit bids in a competitive process for providing funds.