APPENDIX LIBOR Fixings In syndicated banking facilities and derivative contracts, there must be some objective way of determining the rate of interest to be applied. For instance, under interest rate swaps, at each roll-over or interest rate fixing, the floating interest rate has to be established for the next period. At the end of that period a net settlement will be made, consisting of the difference between the float- ing and fixed rate under the swap. With a syndicated loan, either when advances are rolled over or when new advances are requested, the interest rate has to be determined for the relevant period. BBA (British Banks’Association) LIBOR is the BBA fixing of the London Inter-Bank Offered Rate. It is established each day for a number of different maturities. LIBOR is based on a panel of contributor banks contributing the rate at which they could borrow funds in reasonable market size just prior to 11 a.m. The contributor banks are chosen on the basis of reputation and scale of activ- ity in the London market, and perceived expertise in the currency concerned. The contributed rates are ranked in order and the middle two quartiles are averaged arithmetically. The LIBOR fixing process is managed on behalf of BBA by Moneyline Telerate. Once the LIBOR for the currencies’ fixing date and maturities are determined, they are released and distributed among a number of major information vendors such as Reuters and Bloomberg. LIBOR fixings are calculated for a whole range of maturities, from one week to 12 months. BBA LIBOR is fixed for the following currencies: UK£, CA$, €, US$, AU$, yen and CHF. All are fixed on spot apart from UK£, which is same day. Maturity dates are subject to the modified following business day convention. Official fixings are made for a number of markets in other countries. SIBOR is the Singapore Inter-Bank Offered Rate, and HIBOR the Hong Kong Inter- Bank Offered Rate. EURIBOR is the fixing that has been established by the European Banking Federation to benchmark in-zone rates. 388 Glossary Accreting swaps An interest rate swap where the notional principal of the swap increases at each interest fixing. Accrued interest Interest earned but not due and payable. Interest is accrued according to different conventions depending on the particular market. ACH A US money transfer system, similar to the BACS system in the UK. Administrator In a securitization, the task of an administrator is to collect the cash from the underlying assets and maintain all appropriate asset records. The weaker the credit standing of an administrator, the more likely it is that some actual or standby agreement is required for the administrator to be replaced by a more creditworthy party. Agency fee The fee paid to the bank that acts as agent for a syndicated facility. American option An American option can be exercised at any time during the option contract period. Amortizing loan A loan repayable by instalments over a period of time. Such loans are typical of leasing and terms loans. Arrangement fee The fee paid to the arranger for arranging the syndication of a committed facility. It may also 389 390 GLOSSARY include an underwriting fee if the facility is being underwritten. An arrangement fee is an upfront fee. Arranger The bank responsible for syndicating a commit- ted facility. The arranger is responsible for advising on the price and terms at which a facil- ity can be successfully syndicated and for invit- ing participation. Assignment A method for the transfer of receivables together with associated rights and interests. In the case of an unconditional assignment, the assignee has direct legal rights against the underlying receiv- ables and the obligors are informed. Alterna- tively, it may be conditional, in which case recovery by the assignee requires the completion of the necessary steps to make it absolute, or the assignee is required to join in any action the assignor takes against the underlying receivables and obligors. At the money There would be neither gain nor loss in exercis- ing the option. The exercise price is equal to the current market price of the asset. Automated Standing instruction to move all or some end- investment of of-day balances from an account to an invest- surplus funds ment vehicle. Transaction initiation is normally based on credit position of accounts. Average rate option Market prices of the underlying asset are averaged over the option period. At the end of the option period, the average of the prices is compared with the strike price in determining whether the option can be exercised. BACS (Bankers Automated Clearing Services.) BACS is a low value, bulk clearing system that handles automated credits, debits and standing orders. BACS provides an automated clearing house service in the UK for the clearing of transactions originated by settlement members or others sponsored by them to use the service. Similar GLOSSARY 391 systems exist in most countries, such as ACH in US and Autopay in Hong Kong. Bank relationship The risk that a company could suffer loss as a risk result of having inadequate banking relationships. Bank transfer An instruction from a payer to a bank to debit his/her account with a specific amount and pay money directly to the account of a third party. Bank transfers may be by wire or telegraphic transfer, or transfers via the bank giro. Banker’s drafts Essentially a cheque drawn by a bank on itself. Banker’s drafts are regarded as cash, since the beneficiary has high confidence he/she will be paid. Bankruptcy remote The SPV is structured to ensure that bankruptcy of the originator does not result in the bankruptcy of the SPV. Basis point 1/100 of one per cent (0.01 per cent). Basis risk The risk that changes in the value of a derivative do not exactly match changes in an underlying exposure. Basis risk arises where it is not possi- ble to find a derivative that perfectly matches the underlying exposure. Basis swap Enables a treasurer to change the interest basis of a loan. Bearer security A negotiable security whose title is to the bearer; that is, it is presumed in law to be owned by the holder. Beneficiary The individual with the right to receive value (payment) under a payment instrument; for example, the beneficiary under a cheque is the payee on the cheque. Beta A measure of the riskiness of a company’s equity against the market as a whole. The shares of company with a beta of two is twice as risky as the market, when risk is measured by volatility of a shares return. 392 GLOSSARY Bid Price at which the market maker is prepared to buy a financial asset. Bid offer spread The difference between the market makers buying and selling price. The size of the spread usually denotes the liquidity in the market. Bilateral lines A facility arranged between just one bank and the borrower. A number of bilaterals can be arranged by a borrower, each with its own margin and terms. Book value The value of assets as recorded in a company’s financial records and stated in its financial statements. Bookbuilding The process whereby the lead manager to a bond issue receives indications of the amount that investors will buy of a bond and the price they are prepared to pay. Bookbuilding takes place during the bookbuilding period prior to launch. Bought deal The lead manager to a bond issue buys the whole of the issue on predetermined terms and price and then places the bonds with his/her own customers. Bridge facilities Facilities intended to bridge the borrower from one event to another, such as the maturity of a loan and a fund raising exercise in the capital markets. Bullet loan A loan that is repayable on one date. Business day The period from 00.01 to 24.00 on any working day. It is used to determine the settlement date of financial transactions. Business risks Those risks that arise from being in a particular industry and geographical area. Call option The option holder has the right to buy an asset at the underlying exercise price. Capital asset pricing A model in corporate finance theory that seeks to model (CAPM) calculate the minimum return that should be GLOSSARY 393 generated by a company’s projects. CAPM is also used to calculate a company’s weighted average cost of capital. Cash Legal tender in notes and coins. Cash concentration As opposed to cash pooling, which involves no movement of funds, cash concentration involves the transfer of funds from accounts in credit either to a central account, or to other accounts which are in debit. In countries where cash pool- ing is unavailable, such as the United States, cash concentration or sweeping is used to manage liquidity. Cash pooling See notional pooling. Cash settlement The settlement of option contracts for cash instead of settlement involving the physical transfer of assets. Central bank A requirement in many countries to report cross- reporting border and currency transactions to the local monetary authority. Certainty of funds A rule applicable in many countries where the advisor to the offeror in an acquisition has to certify the offeror has resources to satisfy full acceptance of the offer. Certificates of A certificate evidencing a bank deposit. The deposit certificate is a bearer instrument that is capable of being traded. Charges Arise when a bond is issued or loan established with security over certain assets. If the borrower defaults on the bond or loan the charged assets can be sold and the proceeds used to repay the debt.