I am not aware of any lending systems which posts gross-ups for swingline or lc sublimits. I am curious to find out if banks disclose these since they represent a credit risk.
In simple terms a swingline sublimit is a commitment under a revolving credit facility by the Swingline Lender (as named in the credit agreement) to "front" a loan to the borrower on behalf of all lenders in a syndicated loan. The purpose is to give the borrower the ability to request funds and receive on the same business day. The swingline lender funds the full amount usually at a higher rate than the traditional 3 month libor loan (which usually requires a couple of days notice for funding), so they are generally short term borrowings repaid in a few days. Also benefits the agent bank (who is usually also the swingline lender) since they don't need to produce borrowing notices to all of the lenders and they don't need to process a large number of fundings from the participant banks.
Here's an example: $100 million revolving credit facility. Bank A has committed to $10 million (10%) of the total facility. The other $90 million (90%) is held by other participating banks. Under the $100 million revolver, the borrower is permitted to take out up to $20 million in swingline loans. Assuming no loan drawings under the facility, what is Bank A's credit risk? What should be reported in the off balance sheet commitment disclosure? I know accountants that believe that $28 million should be reported. Calculation: $10 million Bank A commitment + $18 million gross-up for undrawn swingline sublimit (90% x $20 million undrawn swingline sublimit). I doubt many banks do, and there are billions of credit exposures at many of the lead banks which is not being recorded...most banks would only report if and when the swinglines are drawn. Chances are they aren't reporting the undrawn exposures. Most accountant types at banks probably don't really understand these... credit risk types, attorneys (who draw up the credit agreements) and loan operations folks are more apt to have an understanding of what these are...but not the accountants. This information is buried in the bowels of the booking systems (depending on how good the system is) and most controllers wouldn't know where to find the info.
Granted, the risk is pretty low on these...but it is nonetheless risk. The swinglines are usually only drawn for a couple of days and the swingline lender has the legal right to ask the other participant banks to fund at any time...but they usually don't since they are repaid so quickly.
Also brings up a capital issue...should banks be setting aside capital for these prior to funding?
What do you think?
