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The term "Eurocredit" refers to loans in a currency that is not the lending bank's national currency. Eurocredit loans are large and long-term, and usually only large corporations and government agencies request them. Banks that extend these loans usually also participate in the Eurocurrency Market, where they hold deposits in currencies other than the local currency. The prefix "euro-" is often used in finance to refer to funds in a foreign currency and has nothing to do with Euro currency or European countries.
A bank extends a Eurocredit loan when the loan is not in the bank's national currency and the loan is extended in a country other than the one in whose currency the loan is denominated. For example, an American bank provides a loan denominated in Japanese yen or Russian rubles for an American company. Eurocredit loans increase the flow of capital between various countries and help companies and governments finance their investments.
Banks set the interest rates on these loans based on the prevailing London Interbank Offered Rate (LIBOR), with the rates usually being reset every six months depending on changes in LIBOR. These loans are usually large loans with a fixed term and no provision for early repayment. The loan size is usually large, so banks sometimes form a syndicate to provide a Eurocredit loan that spreads the risk between syndicate banks and limits the risk exposure any one bank faces in case the borrower fails to repay the loan.
For example, a company from Germany borrows $200 million US Dollars (USD) through a syndicated Eurocredit facility for five years at an interest rate of 200 basis points (2 percent) over LIBOR. The interest rate floats and is reset every six months according to the prevailing LIBOR. LIBOR turns out to be at 5 percent for the first six months of the loan and 4 percent for the second six months.
In this case, the loan rate becomes 7 percent for the first six months of the loan and 6 percent for the second six months. The company has to pay $7 million USD in interest six months after taking out the loan and $6 million USD in interest one year after taking out the loan. If the company fails to make its payments, the whole syndicate absorbs the impact so each lending institution only has to bear a portion of the loss.
Eurocredit facilities also often charge an upfront fee for the loan, usually a percentage of the loan. For example, the German company might have to pay 2 percent at the beginning of the loan to cover administrative and operative costs. It would have to pay $4 million USD and would effectively receive only $196 million when taking out the loan.
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