DEFINITION of 'Competitive Bid Option'

A competitive bid option is a form of the commercial loan syndication where banks submit competing bids on a loan in order to win the deal. They can also sell their portion of the participation in a loan to other parties. The borrower thus has a choice of banks to choose from, and will generally pick the lender with lowest rates and/or fees. In most cases, the leading bank in the syndicate allocates the majority of the actual loan balance to other lenders and only keeps a small percentage of the loan for itself. The option part of the competitive bidding process refers to the fact that non-lead syndicate members can choose to match the best rate or price, or else choose to abstain.

Competitive bid options are usually priced at just above the lender's cost of funds, or from that of an index such as the LIBOR. The competitive bid process for commercial and industrial loans with U.S. banks closely resembles the tender panel process in the Eurocredit market. In this arrangement, several banks bid to buy short-term corporate notes via a revolving underwriting facility (RUF).

BREAKING DOWN 'Competitive Bid Option'

A competitive bid option allows for a borrower, typically a municipality in the municipal bond market but also found elsewhere, to have banks compete to offer the lowest interest rate. After that bidding process has established a best rate (or best price), other members of the bidding syndicate have the option to match it or abstain from the deal. For those who match, the lead bank in the syndicate will divvy up the loan among each other.

For the bidding banks, the benefit of the competitive bid option is that it allows banks the opportunity to offer loans, but without the commitment. If a bank has plenty of capital, it can make a bid, but if it is experiencing lean times, it has no obligation to match the best bid and can hold off until timesĀ  get better for the bank, or for higher rates to be offered by the syndicate.

Competitive Bid Option in Retail Lending

With the advent of internet banking and online financial services, individual borrowers can now also benefit from a competitive bidding process, where banks can also have the option to match the best offer. This is most common in online quotes for mortgages or home equity lines of credit (HELOC), as well as for auto loans. Here, borrowers not only see who has the best rates but also the best total annual percentage yield (APY) after fees have been accounted for.

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