Note Issuance Facility (NIF) offers a good mix of capital market and syndicated loan operations. Note Issuance Facility is a usual medium term, floating rate, funding instrument – it is a long-term position for the investor who has shifted their performance for short term in view of the country risks of some less developed countries. NIF is a medium term arrangement under which borrowers can issue short term papers (called a Euro note) with the underwriting support of the commercial banks. The different names given to these main facilities with some variation in its terms are revolving underwriting facility(RUF), short-term note issuance facility (SNIP), transferable revolving underwriting facility (TRUF) and Note Purchase Facility (NPF). Note Issuance Facility is the legally binding commitments of the underwriting banks to support funding for a period of say, five years.
Mechanism and Documentation of Note Issuance Facility (NIF)
The issuer of Note Issuance Facility issues instructions to the lead manager or the facility agent to issue Euro notes as per the placement arrangement agreed between them at predetermined intervals. Certain basic rules relating to interval between two issues, maximum and minimum amount of issues are stipulated before hand. The facility agents then arrange to sell the euro notes through the agreed placement arrangement. In case the Euro notes do not get sold, then the underwriter takes up the unsold portion on pro rata basis. The NIFs are more attractive to the preferential investors. Mainly commercial banks, non-banking financial institution/companies, are major investors. The underwriters are more attracted to NIF in view of lesser risks and an increased return on assets and easy marketable features. NIF carry three major cost components such as underwriter’s fees, (on the entire amount of underwriting, one time management fees, for structuring, pricing, syndication and documentation) and the margin of notes. This margin is normally by way of spread over or below LIBOR or in built in the NIF pricing itself.
The documentation consists of underwriting agreements; issuing and paying agency agreement, dealership or tender panel agreement, information memorandum. The notes are in the bearer form. Documentation for different facilities is prepared separately but largely conform to standardized master contracts. Underwriting agreement specifies agreement between the parties, in respect of the amount, fee, etc. The issuing and paying agreement state procedures for handling of notes and the payments. The memorandum of information gives relevant operational information and financial position of the borrower (issuer). The settlements are effected through either physical delivery or through a clearing house without the actual delivery of notes.