Using a long term capital management model, such as a Syndicated credit facility, is an important way to help your business stay stable and profitable. When used correctly, this model can help your business avoid costly and time-consuming downturns. While there are many types of models, there are certain characteristics that all models should have. Those characteristics include a rational market, syndication of a credit facility, and a partner’s willingness to relinquish control.
Syndicated credit facility
A syndicated credit facility for long term capital management is a form of financing in which a large amount is loaned to a single or several borrowers. These loans can be structured in a variety of ways, such as term loans, revolving loans, standby L/C lines, and other securities. The borrower can be a corporation, government, or individual project.
Syndicated loans are one of the dominant ways for large corporations to receive loans in the U.S. and Europe. The rationale behind these loans is to distribute risk among several institutional investors. This is accomplished through lead arrangers. They organize funding, negotiate with borrowers, and drum up interest in debt markets.
Lead arrangers are typically investment banks. These banks organize the funding, negotiate with borrowers, and organize distribution. They also organize the feasibility of the syndicate and handle management work.
Syndicated credit facilities are secured by a lien on a cash reserve fund. Syndicated loans can be structured in several currencies. This helps to avoid currency risks.
LTCM (Long-Term Capital Management) is a large hedge fund in the U.S., based in Greenwich, Connecticut. It was founded in 1974 by John Meriwether, who had worked as a bond arbitrager for Salomon Brothers. Later, he organized a new fund. The fund grew to over $100 billion in assets in three years. It was run by finance veterans and PhDs and saw yearly returns of over 40%.
The Long-Term Capital Management fiasco shocked Wall Street in 1998. It showed the shortcomings of the assumptions behind the fund. It also illustrated how risk premiums for risky investments could rise during a crisis.
Long-Term Capital Management was over-leveraged and over-invested in esoteric securities. Wall Street feared that the fund would cause a systemic meltdown, so the Federal Reserve intervened to prevent it. The fund was bailed out in 1998. The rescue involved a consortium of 16 financial institutions, including Barclays, Chase Manhattan Bank, Credit Suisse, Deutsche Bank, Goldman Sachs, Paribas, Merrill Lynch, and Morgan Stanley. They contributed $3.6 billion to the bail-out fund.