What Is A Parallel Loan Agreement

With back-back loans, two parties, each in another country, lend each other money to hedge against foreign exchange risks. They are also called “parallel loans.” Businesses can use other means of purchasing credit that would protect against foreign exchange risks outside of parallel credit. Trading in foreign exchange markets is another option that companies are looking for to gain access to financing in the desired currency, they can trade either in cash or in futures contracts. In addition, parallel lending has lost its importance with the advent of forex trading platforms, with the exception of cases where two parent companies enter into a direct trading agreement. Not only has the parallel lending evolved to circumvent exchange control rules, but it also allows companies to borrow funds in foreign currencies at rates lower than they could obtain on the foreign exchange market, such as foreign companies. In this situation, the parallel loan brings certain advantages and disadvantages to businesses. The risk of default is also a problem, as the inability of one party to repay the loan in a timely manner does not release the other party`s obligations. As a general rule, this risk is offset by another financial agreement or by an emergency clause contained in the original loan agreement. The parallel credit market was created to avoid restrictions imposed by the Bank of England on the free movement of sterling. Most British companies wishing to invest abroad must exchange books in US dollars at an exchange rate above the market exchange rate. The motivation behind this strategy was to ensure the value of the pound under other currencies. However, companies were not interested in providing financial assistance to the Bank of England by setting the aforementioned market price for every dollar obtained from the exchange rate instituted by the policy.

The prevention of this monetary control leads directly to the improvement of the currency exchange market. [6] [Page required] Cooperation between international financial institutions increased considerably after the 2008 global financial crisis and the resulting lack of liquidity for commercial banks. In October 2009, IFC signed a master cooperation agreement (MCA) with the three largest European development finance institutions, DEG, FMO and Proparco. The agreement explains how dieE collaborates to co-finance projects when the IFC is the mandated lead arranger. The MCA also offers documentation models that significantly reduce costs and increase efficiency. The central objective of a parallel loan is to cover foreign exchange risks between two companies from two different countries. If a parallel loan agreement is entered into between two companies, the loan will be repaid at a future date and at a predetermined exchange rate.