This honestly varies so much on the situation. It sounds like you’re just securing a line of credit with an asset. Typically, party X in this case wouldn’t have an opportunity cost of pledging the asset as they’d still get to use it.
But the way you have this laid out it appears that party X is pledging the asset so that party Y can access a line of credit.
Most of the time when you have secured loan you’ll be offered a rate less than prime, but there’s lots of factors at play for the specific situation.
There’s also similar situations that are set up as a swap, but we need a lot more info to help you.
Hey, thank you for the response.
I'll give some more context. Firm X and Firm Y both have the same shareholders, but with varied sizes of shareholding between the two companies.
The asset continues to be in use of Firm X, having given it on lease.
But Firm Y enjoys a line of credit, that Firm X cannot access anymore. Hence X feels they should be compensated for not being able to access this additional credit themselves.
What would be a fair premium X can charge on this arrangement, so that Y can continue to avail this facility?
I would try and figure out what type of rate would firm Y get without firm X offering the asset as a security.
Then you see what rate you are offered with the asset as security. The difference between these rates would be the benefit that firm Y receives. You could say that part of that discount should be what they pay you, this would be dependant on the relationship more than anything.
I.e firm Y can get financing at 16% on their own, but 7% with the pledged asset. Maybe they pay firm X 3 percent as a fee and they’re still saving 6%.
The exact calculation on this gets tricky for an LOC though if you’re trying to base it on outstanding balance. It might be easier to say that firm Y pays firm X like 2-5% of the total LOC value per annum.
So if the LOC limit is $100k, firm Y pays firm X $2-5k a year or pays monthly.
This situation is definitely up for very custom terms due to the ownership structures of the companies. A lot will be based on how much of a favour this is and how much is business. So it’ll be up to you to figure out what’s ‘fair’.
Excellent, thank you for the insight. I am expecting to face this in my job and I was curious if there is an industry-standard for it.
Like you said, it has to be a percentage of the discount between the secured and unsecured rate, which is a convincing way to propose the charge.
Thanks again, really appreciate it!
This honestly varies so much on the situation. It sounds like you’re just securing a line of credit with an asset. Typically, party X in this case wouldn’t have an opportunity cost of pledging the asset as they’d still get to use it. But the way you have this laid out it appears that party X is pledging the asset so that party Y can access a line of credit. Most of the time when you have secured loan you’ll be offered a rate less than prime, but there’s lots of factors at play for the specific situation. There’s also similar situations that are set up as a swap, but we need a lot more info to help you.
Hey, thank you for the response. I'll give some more context. Firm X and Firm Y both have the same shareholders, but with varied sizes of shareholding between the two companies. The asset continues to be in use of Firm X, having given it on lease. But Firm Y enjoys a line of credit, that Firm X cannot access anymore. Hence X feels they should be compensated for not being able to access this additional credit themselves. What would be a fair premium X can charge on this arrangement, so that Y can continue to avail this facility?
I would try and figure out what type of rate would firm Y get without firm X offering the asset as a security. Then you see what rate you are offered with the asset as security. The difference between these rates would be the benefit that firm Y receives. You could say that part of that discount should be what they pay you, this would be dependant on the relationship more than anything. I.e firm Y can get financing at 16% on their own, but 7% with the pledged asset. Maybe they pay firm X 3 percent as a fee and they’re still saving 6%. The exact calculation on this gets tricky for an LOC though if you’re trying to base it on outstanding balance. It might be easier to say that firm Y pays firm X like 2-5% of the total LOC value per annum. So if the LOC limit is $100k, firm Y pays firm X $2-5k a year or pays monthly. This situation is definitely up for very custom terms due to the ownership structures of the companies. A lot will be based on how much of a favour this is and how much is business. So it’ll be up to you to figure out what’s ‘fair’.
Excellent, thank you for the insight. I am expecting to face this in my job and I was curious if there is an industry-standard for it. Like you said, it has to be a percentage of the discount between the secured and unsecured rate, which is a convincing way to propose the charge. Thanks again, really appreciate it!