Pro rata borrowings: Overview, definition, and example
What are pro rata borrowings?
Pro rata borrowings refer to a system in which multiple lenders provide funds to a borrower in proportion to their agreed share of a total loan facility. Each lender contributes and is repaid based on their respective percentage of the total loan, ensuring equal distribution of credit risk and repayment.
For example, if three banks each agree to fund 33% of a $3 million loan, the borrower receives funds proportionally from each bank and repays them in the same proportion.
Why are pro rata borrowings important?
Pro rata borrowings ensure fairness and equal participation among multiple lenders in a syndicated loan or credit agreement. They help distribute risk evenly and maintain consistency in how loans are funded and repaid.
For businesses, pro rata borrowings provide access to larger loan amounts by pooling multiple lenders. This structure also benefits lenders by reducing individual exposure to risk while maintaining proportional repayment terms.
Understanding pro rata borrowings through an example
Imagine a company secures a $10 million syndicated loan from three lenders:
- Bank A funds 40% ($4 million)
- Bank B funds 35% ($3.5 million)
- Bank C funds 25% ($2.5 million)
Under a pro rata borrowing structure:
- Each bank disburses funds to the borrower in proportion to their agreed share.
- When the borrower makes repayments, each bank receives its share based on the same percentage.
- If the borrower requests an additional drawdown, the funds are again provided in the same pro rata portions.
This ensures that no single lender bears an unfair share of the loan risk or repayment burden.
An example of a pro rata borrowings clause
Here’s how a pro rata borrowings clause might appear in a loan agreement:
“All borrowings under this Agreement shall be made on a pro rata basis among the Lenders in proportion to their respective Commitment Percentages. Repayments of principal and interest shall be distributed to the Lenders in the same proportion.”
Conclusion
Pro rata borrowings create a structured and fair system for distributing loan funds and repayments among multiple lenders. This approach ensures risk-sharing, consistent financing terms, and an organized repayment process, benefiting both borrowers and lenders in syndicated loan agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.