We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Eurocredit?

By Deanira Bong
Updated: May 16, 2024
Views: 15,007
Share

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.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
Share
https://www.smartcapitalmind.com/what-is-a-eurocredit.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.