Board of Governors of the Federal Reserve System

September 1985

Comparing Costs of Note Issuance Facilities and Eurocredits

Rodney H. Mills

Abstract:

Since early 1984, note issuance facilities (NIFs) have in considerable degree replaced syndicated Eurocurrency bank credits in international credit markets, especially for borrowers in industrial countries, because borrowers have found it cheaper to bypass bank syndications and obtain funds more directly by issuing Euronotes. Factors behind this include an increasing awareness of borrowing possibilities, more freedom for Japanese investors to buy foreign securities, a drop in the relative popularity of bank obligations with investors, and banks' desire to slow asset growth to improve capital ratios.

Measurement of the cost savings to borrowers on NIFs as compared with Eurocredits is difficult because of limited comparison possibilities. Most NIFs arranged so far have not been drawn on through issuance of notes, and few of the actual issuers have arranged LIBOR-priced Eurocredits recently. In the 12 cases, as of mid-1985, where meaningful comparisons could be made, it appears that the cost savings to the borrowers ranged from about 10 to around 50 basis points. All of the savings were in the interest spread, where the NIFs appear to have been about 15 to 55 basis points cheaper. Fee costs were slightly higher on NIFs than on Eurocredits; although front-end fees are lower, the total fee costs for NIFs are higher because of the annual facility fee paid to banks that underwrite the NIF.

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