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Multiple Option Facility (MOF)
The multiple option facility otherwise known
as MOF is a
flexible
method of tapping the money markets for
short-term funds. This is similar to commercial paper since the money
can only be
borrowed for a short
time frame, however the MOF does provide the
facility for funds to be rolled over.
So for example if one fund falls due after a
certain period another
loan can be taken out to replace it. Commercial property companies can can
raise an MOF for about £25 million and up.
The
MOF can provide cheap funds because it
encourages banks to compete to provide loans on favorable terms. The MOF
can take a number of different structures but the most common form is the
two part structure known as the guaranteed or committed facility and the
unguaranteed and uncommitted facility. The unguaranteed or uncommitted
facility usually allows the property company to borrow at more favorable
terms.
To give an example of how a MOF works consider a property company say
Focusnet which wants to borrow say £100 million pounds.
This would mean that Focusnet could only have 100 million outstanding at at
any given time (with a life of say 4 years). Focusnet could then instruct a
bank to set up the facility for it. The instructed bank would then set a
syndicate of banks who agree that jointly they will provide up to a total £100
million if called upon to do so. The interest rate would be agreed at this
point and would often be quoted at a margin over LIBOR. So lets say that
Focusnet gets a quote of 20 basis points above LIBOR and lets say the LIBOR
rate is 5% then the lending rate would be 5.20%. Borrowing costs will rise
and fall with the movement of LIBOR but the highest amount the company pays
in relation to LIBOR stays constant.
However
an important point is that
the highest amount quoted will not
necessarily be the highest amount that the company will pay and the reason forr
this is due to the second part of of the MOF
which is
the uncommitted facility. In the second part
of the MOF facility the arranging bank puts together a tender panel which
will add some banks into the original syndicate that agreed to the committed
facility. When Focusnet wants to borrow the tender banks are invited to bid
to provide the money. Those offering the cheapest rates will lend the money.
If the banks in the tender do not provide the money ney or provide the money
at a to expensive rate for Focusnet. Then Focusnet can fallback on the committed facility
and borrow at 5.20%.
However in the end Focusnet gets the funding
that it needs.
This 2 part system has a number of advantages for the commercial property
company, because it produces competition for the lending banks. In the
uncommitted part Banks which are flush with cash at the time the money is
required can bid to put up the money. Those that are not flush with can
choose not to bid. The cost of the uncommitted funds will usually be lower
than the cost of the committed funds because the tender banks are not
required to supply the loan whether it is convenient or not for them.
In certain cases
the limit on the uncommitted facility will be
the same as on the committed facility. Sometimes the uncommitted facility
will be larger. So for example the committed facility
can be £100
million pounds and the uncommitted facility can be £125 million
pounds. Therefore the highest amount it can borrow is £125 million but the
property company is not guaranteed more than £100 million.
The Multple Option in the the name Multiple
option facility refers to the ability of the property company to borrow
money in multiple forms and can pick the type which is the most suitable or
offers the cheapest rate at the time.
at the time.
Sometimes a commercial paper facility is included in the MOF (if you are not
sure what a commercial paper facility is, then check out the commercial
paper page on this website.) But a another variation is to set up the
commercial paper function separately. So that the MOF can provide a backup
if the commercial paper function cannot be renewed. The costs of the MOF can
be calculated by adding up all the fees involved. There will be upfront fees
payable to the arranging bank which is often expressed as a rate over the
life of the loan and there is also an underwriting fee for the banks which
provide the committed facility.
the end result is that the property company hopes that the tender panel will
be able to provide funds at a cheap rate and that the company will not need
to draw on the committed facility. Sometimes there is also a utilisation fee
if it does in fact draw more than a certain portion of the committed
facility. This is actually a protection mechanism for the banks, to account
for unforseen events. To illustrate lets say that a property companies
credit rating takes a hit and it is unable to raise any funds in the
uncommitted
way, the only way it can then raise funds would be through the committed way
so the utilisation fee could be a way for the committed banks to protect
them selves from a borrower with a suddenly damaged credit rating.ime.