Ratable loans: Overview, definition, and example
What are ratable loans?
Ratable loans, also known as "pro-rata loans," are loans that are structured so that the loan amount is distributed or repaid among multiple lenders or investors in proportion to their share of the total loan. The term "ratable" refers to the equal or proportional distribution of payments, risks, or returns among all parties involved in the loan agreement. This type of loan is typically used in syndicate lending or syndicated loans, where a group of lenders pools resources to lend a large sum to a borrower.
In ratable loans, the borrowers make periodic payments, and each lender receives their share of those payments in line with their percentage of the total loan. Similarly, if the loan needs to be repaid early or refinanced, the repayment is made proportionally to each lender’s share of the loan.
Why are ratable loans important?
Ratable loans are important because they allow for the pooling of capital from multiple lenders, which makes it easier to lend large amounts of money. By sharing the risk and the return, lenders can diversify their portfolios, reducing individual exposure to the borrower’s credit risk.
For borrowers, ratable loans provide access to larger sums of money than they might be able to secure from a single lender, as the risk is spread among multiple institutions. This structure is especially useful for financing large projects or acquisitions where the total loan amount exceeds the lending capacity of any one financial institution.
Understanding ratable loans through an example
Imagine a company, ABC Corp., seeking a $100 million loan to finance an expansion project. Since no single bank is willing to provide such a large loan, ABC Corp. enters into a syndicated loan agreement where multiple banks agree to lend the company the money.
In this case, Bank A lends $40 million, Bank B lends $30 million, and Bank C lends $30 million. Each of these banks is participating in the loan on a pro-rata or ratable basis. As the loan is repaid, each bank receives its proportionate share of the repayments, based on the amount they originally lent. If the company makes a $10 million payment, Bank A will receive $4 million, Bank B will receive $3 million, and Bank C will also receive $3 million.
In another example, a real estate development company enters into a ratable loan agreement with a syndicate of banks to fund the construction of a large commercial property. Each bank agrees to contribute to the total loan based on its desired exposure, and any future repayments are made proportionally to each bank’s share of the loan.
An example of a ratable loan clause
Here’s how a ratable loan clause might appear in a loan agreement:
“The Borrower agrees to repay the loan in installments, with each payment made to the Lenders in accordance with their pro-rata share of the total loan amount. Payments shall be allocated as follows: Lender A shall receive 40%, Lender B shall receive 30%, and Lender C shall receive 30% of each repayment made by the Borrower.”
Conclusion
Ratable loans are a vital financial structure used to facilitate large-scale lending by distributing both the risk and the rewards among multiple lenders. This arrangement allows businesses to access larger sums of capital than they might be able to secure from a single lender, while also diversifying the risk for each participating lender. Whether in syndicated loans for corporate financing, large-scale projects, or real estate ventures, ratable loans help meet the financing needs of borrowers while balancing the exposure of lenders.
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.