Competitive Bid Option
What Is a Competitive Bid Option?
A competitive bid option is a form of loan syndication in which individuals from a group of banks submit rival offers to fund a loan.
Figuring out Competitive Bid Options
Loan syndication is the most common way of including a group of lenders in funding different portions of a loan for a single borrower. In a competitive bid option, the arrangement has a slight twist: The banks in the group submit differing offers on a loan to win the deal, to some degree like in an auction. Each participating bank can service that loan or opt to sell their portion of the participation in that loan to different parties.
The borrower subsequently has a selection of banks to look over, and will generally pick the lender with the least interest rates as well as fees. As a rule, the leading bank in the syndicate designates the majority of the real loan balance to different lenders and just saves a small percentage of the loan for itself. The option part of the competitive bidding process alludes to the way that non-lead syndicate individuals can decide to match the best rate or price, or, in all likelihood decide to go without.
Competitive bid options are typically priced at just over the lender's cost of funds, or over an index like the London Interbank Offered Rate (LIBOR).
The competitive bid process for commercial and industrial loans with U.S. banks closely looks like the tender panel process in the Eurocredit market. In this arrangement, several banks bid to buy short-term corporate notes by means of a revolving underwriting facility (RUF).
Benefits of Competitive Bid Options
A competitive bid option takes into consideration a borrower to have banks contend to offer the most reduced interest rate. After that bidding interaction has laid out a best rate (or best price), different individuals from the bidding syndicate have the option to match it or go without the deal. For the people who match, the lead bank in the syndicate will evenly divide the loan among them.
For the bidding banks, the benefit of the competitive bid option is that it permits them the opportunity to offer loans, however without the commitment — the same way a stock option gives an investor the right, yet not the obligation, to buy or sell the equities at a given price. On the off chance that a bank has a lot of capital, it can make a bid, however assuming that it is encountering lean times, it has no obligation to match the best bid and can hold off until its financial condition improves, or for the syndicate to offer higher rates.
Loan syndication in everyday offers several benefits. The two primary ones are that it permits banks and different lenders to:
- Differentiate their lending to more extensive demographic locales.
- Participate in larger loans (and to greater clients) that they probably won't have the option to finance totally without anyone else.
Special Considerations
Loan syndication is much of the time utilized in corporate financing — funding large capital ventures that companies embrace. The competitive bid option in particular commonly happens in the municipal bond market. Borrowers are urban communities, states, or municipalities seeking to fund-raise for public ventures and works. The loans appear as municipal bonds that the banks are underwriting.
With the appearance of internet banking and online financial services, individual borrowers can now likewise benefit from a cycle like the competitive bid option, in which lenders offer statements for loans, and can have the option to match the best offer.
This retail variant of the cycle is most common in land related financing instruments, for example, [mortgages](/home loan) or home equity lines of credit (HELOC), as well concerning car loans. Here, borrowers not just see who has the best interest rates yet in addition the best total annual percentage yield (APY), after fees have been represented.
Features
- After that bidding cycle has laid out the best rate (or best price), different individuals from the syndicate have the option to match it or swear off the deal; the people who match will evenly divide the loan among them.
- Competitive bid options give borrowers — generally companies or municipalities — a scope of decisions in lenders and rates.
- For the banks, the benefit of the competitive bid option is that it permits them the opportunity to offer loans, however without the commitment.
- A competitive bid option is a form of loan syndication where lenders inside a group submit rival offers to fund a loan or debt.
