Non Commercial Loans

Non-commercial loans

Non-productive loans are granted by commercial banks. Ordinary commercial loans Borrowings are replaced by new fixed-interest borrowings at a lower prevailing interest, before they mature. Creditors are eligible for indemnity because the interest level of liabilities is higher than actual commercial interest levels. Effects on new admission may vary depending on whether the remuneration is paid in the form of either barter or supplementary promissory note.

Let us assume that a creditor currently has £100 of promissory note money for which 100 was spent on the issuance. Fair value of the outstanding promissory note is now £110. To what degree the 10 pound co-payment is payable in cash depends in part on the decisions of the creditors.

£100 of the current promissory note could be redeemed for 110 of new promissory note without paying anything in money, or for example 104 of new promissory note and 6 of money. The interest on the new promissory note can be considered to be at a normal commercial interest rates. However, this could still be seen as more than a fair commercial yield.

If, for example, 100 pounds of legacy bonds were swapped for 110 pounds of new bonds, the new quid pro quo for the 110 pounds of new bonds could be limited to 100 pounds of the funds obtained for the legacy bonds. An interest to be paid on the commercial bond for £110 may top a fair commercial yield on the initial promissory note of £100.

Whilst'in the round' funding can be regarded as debt financing (i.e. on conditions equivalent to a third provider agreement), the appropriate commercial rate of return requirements must be carefully assessed. It could be said that the interest on the new promissory note represents more than a fair economic rate of return for the creditor from the new quid pro quo, as the new quid pro quo obtained (possibly limited to 100) for these promissory note is lower than their face value (110).

It is not necessary for new quid pro quo to be provided in terms of liquid funds and it may be possible to design the agreements in such a way that any asset constituting an adequate new quid pro quo is assigned to the new obligor. For both cases, it must be examined whether the undertaking receives adequate new remuneration for assuming the obligation.

Otherwise, the guarantee may not be a commercial credit. An essential point here is that the new quid pro quo obtained from the initial borrowers is not applied to the new 'borrower'. Sometimes there are circumstances where a credit obligation arising from a credit agreement between two UK affiliates is assigned within a group.

An intercompany borrowing arrangement endorsement policy may be used to designate the consideration given and receivable for the endorsement so that there is no profit or loss for the purpose of the borrowing arrangement. However, this counterperformance, which is regarded as counterperformance, is not transferred to the usual reserves for commercial loans. The important thing is to verify whether the new "borrower" has obtained a new quid pro quo equivalent to the amount taken up.

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