What it means
Large companies and governments often raise short-term money by issuing notes, which are short-dated IOUs sold to investors. The risk is that, on the day the borrower needs the money, investors may not want to buy.
A SNIF removes that worry by lining up banks that have agreed to take up unsold notes, or lend the equivalent amount, up to an agreed limit. The facility usually runs for several years, even though each note matures in weeks or months.
The borrower issues notes repeatedly under the facility, often through a tender panel of banks or dealers who bid for them. If bids are too weak or too expensive, the underwriting banks step in at a pre-agreed pricing formula, such as a margin over a benchmark rate.
The banks earn money in two ways. They receive an underwriting or commitment fee for standing ready, even if the facility is never used, and they earn a margin on any notes or loans they actually take.
For the borrower, the fee is the price of certainty, and it is generally lower than the cost of borrowing from banks all the time. SNIFs grew out of the international bond and loan markets in the 1980s as a way to combine the lower cost of market funding with the security of a bank line.
In practice, many borrowers later moved to similar arrangements such as backup credit lines for commercial paper programmes. The name is less common now, but the idea remains central to liquidity planning.
The main nuance is that a SNIF is a promise with conditions. The agreement may let banks refuse to fund if there has been a material adverse change in the borrower's position or if covenants have been broken.
A borrower should therefore read the conditions carefully and avoid assuming that the backstop is unconditional. Another point is that the facility sits off the balance sheet until it is used.
The undrawn amount is a contingent commitment, which the banks must consider in their own capital and risk planning, and which rating agencies take into account when judging the borrower's liquidity. Treasurers should disclose and manage it as part of their funding plan.
In practice
Real-world examples.
Example
A utility company issues one-month notes each month to fund working capital. It arranges a SNIF so that if investors are unwilling to buy in a stressed market, the banks will fund the gap. The utility keeps issuing notes in normal times at lower cost than bank loans.
Example
A shipping group with large seasonal needs signs a five-year SNIF of $250 million. In a quiet quarter it never draws, paying only the fee. In a crowded market it uses the backstop for a few weeks and then returns to investors.
Example
A government agency uses a SNIF to assure its dealers that it will always be able to roll over short-term debt. This reassures investors and keeps the agency's borrowing costs steady. The agency's treasury team reviews the facility every year.
Formula
Calculation
Annual commitment fee = Facility size x Commitment fee rate
Cost of any usage = Notes taken up x (Benchmark rate + Margin)
Suppose a company arranges a $100,000,000 SNIF with a commitment fee of 0.20% a year. The fee is 100,000,000 x 0.002 = $200,000 per year, whether or not the banks fund anything. Now suppose in one month $20,000,000 of notes go unsold and the banks take them up for 30 days at an annualised rate of 5.5%. The interest for that month is 20,000,000 x 0.055 x 30/360 = $91,667, rounded to the nearest dollar.Case study
Seen in the real world.
Northwind Energy is a fictional company that raises $300 million of short-term notes every quarter to fund fuel purchases. During a period of market stress, this illustrative company found that its notes were harder to sell, and it was forced to pay much higher rates for a few weeks. This is a fictional scenario, not a real company.
The treasurer arranged a $300 million SNIF with a group of eight banks, paying a fee of 0.25% a year. The following year, when investor demand dipped again, the banks took up $60 million of notes at the agreed margin and the company's operations were not disrupted. The treasurer told the board that the fee of $750,000 a year had been a fair price for certainty.
Watch out
Common mistakes.
- Treating a SNIF as free insurance. The commitment fee is a real cost, and any drawing is priced at a margin.
- Assuming the banks must fund in every situation. Conditions and covenants may let them refuse if the borrower's position has deteriorated.
- Confusing a SNIF with a simple bank loan. The borrower mainly funds itself in the market, and the banks are there as a backstop.
Questions
People also ask.
How is a SNIF different from a revolving credit facility?
A revolver is a direct bank loan the borrower draws on, while a SNIF is aimed at supporting the sale of notes to investors, with banks buying only what is left.
Who pays the fees?
The borrower pays the banks a commitment or underwriting fee, and a margin on any amounts the banks actually fund.
Are SNIFs still used?
The exact name is rarer today, but backup facilities for short-term note and commercial paper programmes work on the same principle.
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