Credit margins are reset quarterly according to market conditions:
The credit spreads charged by the Corporate Funding Association to its members are reset quarterly in accordance with the following items:
• credit rating of the borrower
• residual maturity of the credit facility
• market conditions observable in the secondary corporate bond markets
• CFA’s own adjustment based on items such as its cost of funding and its cost of risk for the quarter .
The quarterly pricing grid applies to all the members’ outstanding credit facilities, on which undrawn amounts are charged 35% of the margin.
Consequence:
When economic conditions are good, CFA lends at low credit spread conditions.
Under a deteriorated economic or market environment, CFA lends to its corporate Members at higher credit spreads, thereby increasing its capacity to absorb an increased cost of default and to protect its regulatory capital.
This groundbreaking pricing mechanism, which avoids the risk for CFA to suffer a net accounting loss for the year, cannot be applied by traditional banks because their borrowers are not their shareholders. In practice, as the excess revenues of CFA are redistributable through dividends, the members will actually pay the “true” and “transparent” cost of bank credit. Over the long term, the cost of financing is improved.