What Is Cross-Border Financing?
Cross-border financing refers to any financing arrangement that crosses national borders. Cross border financing could include cross border loans, letters of credit, repatriable income, or bankers acceptances (BA), for example, issued in the United States for the benefit of a person in Canada.
Cross-Border Financing Explained
Cross border financing within corporations can become very complex, mostly because almost every inter-company loan that crosses national borders has tax consequences. This occurs even when the loans or credit are extended by a third party, such as a bank. Large, international corporations have entire teams of accountants, lawyers, and tax experts that evaluate the most tax-efficient ways of financing overseas operations.
In cross-border financing, currency risk and political risk are also present. If structuring terms of a loan across nations and currencies, the potential to obtain a favorable rate could be a challenge; shifting political climates, including elections or coups, could hinder a deal’s completion, too.
While financial institutions remain with the lion's share of business for many cross-border loan and debt capital market financing, increasingly private credit borrowers have supported the arrangement and provision of loans globally. U.S. debt and loan capital markets overall have remained remarkably healthy after the 2008 financial crisis and they continue to offer attractive returns for foreign borrowers.
Example of a Notable Cross-Border Financing Transaction
In September 2017, Toshiba agreed to sell its roughly $18 billion memory chip unit to a consortium, led by Bain Capital. The group of investors also included Apple, Inc., Dell, Inc., among others. The acquisition required U.S.-headquartered companies within the consortium to obtain Japanese yen to complete the deal; Bain Capital also required upwards of $3 billion from Apple to close the negotiation.
In recent years many corporations, along with sponsors, have chosen loan financing over debt financing. This has affected the structure of many cross border loan financing, particularly as covenant-lite (cov-lite) loans allow the borrower significantly more flexibility than some traditional loan terms. Cov-lite loans require fewer restrictions on collateral, re-payment terms, and level of income on the part of the borrower.
Many companies opt for cross-border financing services when they have global subsidiaries (e.g., a Canadian-based company with one or more subsidiaries located in select countries in Europe and Asia). Opting in for cross-border financing solutions can allow these corporations to maximize their borrowing capacity and access the resources they need for sustained global competition.