Back-to-Back Loan
Barron's Banking Dictionary:
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Back-To-Back Loan
Two-party loan between a parent company in one country and subsidiaries in another. Similar to a Parallel Loan with the important difference that a back-to-back loan gives the lender the right to Offset claims against pledged collateral if the borrower defaults, while the parallel loan does not. The two-party, or parallel loan, is less risky for the lender because the parent company is obligated to step in if a foreign subsidiary fails to pay the note.
Investopedia Financial Dictionary:
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Back-to-Back Loan
A loan in which two companies in different countries borrow offsetting amounts from one another in each other's currency. The purpose of this transaction is to hedge against currency fluctuations. With the advent of currency swaps this type of transaction is no longer used very often.
Investopedia Says:
In a back-to-back loan, a U.S. company would loan US$1000 to a U.K. company in the U.S., and the U.K. company would loan an equivalent amount (at spot exchange rates) in sterling to the U.S. firm in the U.K. Both companies get the currency needed without going to the forex market.
Related Links:
Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers. Currency Exchange: Floating Rate Vs. Fixed Rate
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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