Obtaining A Bank Loan Crisis

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Creation of additional debt
Obtaining a bank loan, just as any debt, increases a government’s aggregate amount of debt. Additional debt is of concern for bondholders as it can weaken a government’s debt position. Knowledge of a government’s entire debt burden is essential in credit and risk analysis.

Contingent liquidity risk
Some bank loan agreements may have covenants or terms that may be more favorable to loan agreements over existing bonds. In some cases banks may be able to effectively prioritize repayment of a bank loan over existing bonds. Certain terms may increase the liquidity risk of the government based on these alternative financing agreements. Terms of loan agreements need to be disclosed to assess and analyze a government’s liquidity position. This is especially the case under acceleration clauses, cross-default provisions, and debt reserve requirements.

Interest rate risk
As for most of the cases, the interest rate on the direct bank loan is a variable rate with predetermined interest reset dates or an index upon which it is based (usually LIBOR or SIFMA rate). Therefore, if the interest rate rises to a level above that for which the government has budgeted, the unbudgeted interest costs would weaken the government’s cash flow, liquidity and credit quality, especially when the interest rate is elevated for an extended period. That is to say, there would be a risk of an increase in the interest rate, which would potentially lead to the loss of those who

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