What it means
The idea comes from Euronote facilities (arrangements in which a company issues short-term notes in the international money markets, backed by banks). The borrower arranges a panel of banks and, each time it wants to issue notes, invites those banks to tender, or bid, for them.
Each bank states the margin it requires over a reference interest rate. The borrower normally accepts the lowest margins first until it has raised the amount it needs, which creates competition between the banks.
The panel is only half the structure. A separate group of underwriters (banks that promise to provide funds if the notes cannot be sold) usually stands behind the facility.
If the tender produces weak bids, the underwriters step in at a pre-agreed maximum margin, so the borrower always has a guaranteed source of funds. For a corporate treasurer, the benefit is lower borrowing cost with a safety net.
The panel brings tight pricing when markets are healthy, and the underwriting commitment protects the company when markets are stressed. Tender panels are less common now than in the decades when note facilities were popular, because syndicated loans and commercial paper programmes cover similar ground.
The term still matters for anyone reading older financing documents or working with structured short-term funding. Treasurers should also read the fine print on how bids are allocated.
Some facilities allow the borrower to reject all bids if margins look too high, while others require the issue to be placed at or below the maximum margin. The documents also set minimum bid sizes and the notice period before each tender, which affect how quickly cash can be raised.
In practice
Real-world examples.
Example
A multinational manufacturer with a $100,000,000 note facility invites its panel of six banks to bid every quarter. The treasurer takes the lowest margins each time and avoids paying a fixed premium. Over a year this lowers the average cost of short-term debt. He reports the savings to the audit committee each year as evidence of good treasury practice.
Example
A shipping company issues notes during a calm market. Panel banks compete hard and the winning margin is thin, so the company never needs to call on the underwriters. The treasury team records the facility as an unused backstop. The facility fee is the only cost for that period.
Example
During a credit squeeze, panel banks bid only for a small slice of a utility's issue. The underwriters fund the rest at the pre-agreed maximum margin. The utility pays more than usual but still gets the cash it needs. The experience convinces the board that the underwriting commitment is worth its fee.
Formula
Calculation
Interest cost of notes = face value x (reference rate + winning margin) x days / 360
A company issues $20,000,000 of three-month notes (90 days). The reference rate is 4.00%. Three panel banks bid margins of 0.20%, 0.15% and 0.18%, and the borrower accepts the lowest at 0.15%.
All-in rate = 4.00% + 0.15% = 4.15%
Interest = 20,000,000 x 0.0415 x 90 / 360 = $207,500
Had the borrower paid the highest margin of 0.20%, interest would be 20,000,000 x 0.0420 x 90 / 360 = $210,000, so competitive tendering saved $2,500 on this issue.Case study
Seen in the real world.
Calder Energy Holdings is an illustrative, fictional company that needed flexible funding for fuel purchases. Its treasurer set up a note facility with a panel of five banks and two lead underwriters.
In the first year, the panel bid margins between 0.12% and 0.25%, and the treasurer accepted only the lowest bids. On $50,000,000 of annual issuance, the average margin was 0.14% rather than the 0.25% cap, a saving of about $55,000.
In the second year, a market shock cut the panel banks' appetite and the underwriters funded part of an issue at the cap. The illustrative takeaway is that the panel earns savings in good times, while the underwriters protect access to cash in bad times. Calder's board now reviews panel membership every year and removes banks that rarely bid.
Watch out
Common mistakes.
- Treating the tender panel and the underwriters as the same group, when their roles are different. Panel members are chosen for their ability to place notes with investors, while underwriters are chosen for their willingness to lend.
- Assuming the borrower must accept every bid, when it normally takes the best margins first. Facility documents usually let the borrower reject bids above the maximum margin, in which case the underwriters step in.
- Ignoring the maximum margin, which sets the worst-case cost of the facility. Comparing facilities on the average margin alone is not enough, because the maximum margin is what protects the borrower in a stressed market.
Questions
People also ask.
Who sits on a tender panel?
Usually a selected group of banks with strong distribution, which compete to buy or place the borrower's notes.
Why would a borrower use a panel?
Competition between banks pushes margins down, while the underwriting commitment gives certainty of funding. Without the underwriting commitment, the borrower could be left without funds in a stressed market.
Is a tender panel the same as a syndicate?
Not exactly, because a syndicate typically commits funds together, while a panel competes issue by issue. Syndicate members share a fixed commitment, whereas panel members win business only by bidding well.
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