Introduction to Revolving Acceptance Facility By Tender
A revolving acceptance facility by tender is a financial arrangement commonly used in corporate finance, allowing companies to issue short-term debt securities known as acceptances to investors through a tender process. This concept may seem complex, but breaking it down can help learners in accounting and finance understand its significance. This guide will explain the definition, process, and examples of revolving acceptance facilities by tender in simple terms.
Definition of Revolving Acceptance Facility By Tender
- What is a Revolving Acceptance Facility By Tender? A revolving acceptance facility by tender is a financing mechanism where a company issues short-term debt instruments called acceptances to investors through a tender process. Acceptances are negotiable instruments that represent a promise by the issuer to pay a specified amount to the holder on a predetermined future date.
- Revolving Nature: The term “revolving” indicates that the facility is not a one-time issuance but can be utilized multiple times over a period. The company can issue acceptances periodically to raise funds as needed, with the ability to replenish or roll over the facility upon maturity.
- Tender Process: The tender process involves inviting investors to submit bids or offers to purchase the company’s acceptances at specified terms, including the desired amount, interest rate, and maturity date. The company evaluates the bids received and accepts those that meet its funding requirements and criteria.
Process of Revolving Acceptance Facility By Tender
- Issuance of Acceptances: The company initiates the process by issuing acceptances, which are short-term debt instruments with a specified face value, maturity date, and interest rate. Acceptances are typically used to finance working capital needs, capital expenditures, or other short-term funding requirements.
- Invitation to Tender: The company announces the availability of its acceptances for purchase through a tender process. Investors, including banks, financial institutions, and individual investors, are invited to submit bids or offers to purchase the acceptances at specified terms, such as the desired amount, interest rate, and maturity date.
- Evaluation of Bids: Upon receiving bids from investors, the company evaluates the offers based on criteria such as the proposed interest rate, maturity date, and overall funding cost. The company may accept or reject bids based on its funding requirements, prevailing market conditions, and the competitiveness of the offers received.
- Acceptance of Bids: After evaluating the bids, the company accepts those that meet its criteria and funding needs. Accepted bids are then finalized, and the company issues the acceptances to the successful bidders, formalizing the financing arrangement.
Example of Revolving Acceptance Facility By Tender
Suppose Company XYZ, a manufacturing company, needs to raise funds to finance its working capital requirements. To do so, it decides to establish a revolving acceptance facility by tender.
- Issuance of Acceptances: Company XYZ issues acceptances with a face value of $1 million, a maturity date of 90 days, and an interest rate of 3% per annum.
- Invitation to Tender: Company XYZ announces the availability of its acceptances for purchase through a tender process. Investors are invited to submit bids to purchase the acceptances, specifying the desired amount, interest rate, and maturity date.
- Evaluation of Bids: Company XYZ receives bids from several investors, including banks and financial institutions. It evaluates the bids based on factors such as the proposed interest rate, maturity date, and overall funding cost.
- Acceptance of Bids: After careful evaluation, Company XYZ accepts bids from investors that meet its funding requirements and criteria. It finalizes the accepted bids and issues the acceptances to the successful investors.
Conclusion
In conclusion, a revolving acceptance facility by tender is a financial arrangement where a company issues short-term debt instruments known as acceptances to investors through a tender process. By utilizing this facility, companies can raise funds as needed, with the flexibility to issue acceptances periodically and replenish the facility upon maturity. Through the tender process, investors have the opportunity to purchase the company’s acceptances based on their desired terms, creating a mutually beneficial financing arrangement for both parties involved.