Legal Definitions - back-to-back loan

A back-to-back loan is a financing arrangement involving two separate but interconnected loan agreements, typically facilitated by an intermediary, often a bank. In this structure, one party (the ultimate lender) deposits funds with the intermediary, and the intermediary then lends an equivalent amount to another party (the ultimate borrower). The terms and conditions of the loan from the intermediary to the ultimate borrower usually mirror those of the deposit made by the ultimate lender to the intermediary.

This type of arrangement is often used to:

• Circumvent foreign exchange controls or other regulatory restrictions.
• Mitigate withholding tax liabilities on interest payments in international transactions.
• Provide financing within a corporate group while leveraging a bank's lending infrastructure or credit assessment.
• Manage risk or provide security for the ultimate lender.

Here are some examples:

• Example 1: International Corporate Financing

  A large multinational corporation, "GlobalTech Inc." (based in the US), wants to provide financing to its subsidiary, "GlobalTech Europe" (based in Germany), for a new product launch. Instead of a direct loan from the US parent to the German subsidiary, which might incur significant withholding taxes on interest payments in Germany, GlobalTech Inc. deposits $50 million with a major international bank. In turn, the same bank then lends $50 million to GlobalTech Europe under similar terms (interest rate, repayment schedule) as the parent company's deposit. This arrangement allows GlobalTech Europe to receive funding while potentially reducing tax burdens and leveraging the bank's local presence and regulatory compliance.

  This illustrates a back-to-back loan because GlobalTech Inc. is the ultimate lender, the bank is the intermediary, and GlobalTech Europe is the ultimate borrower. The bank's loan to the subsidiary is directly linked to and mirrors the deposit made by the parent company.

• Example 2: Intra-Group Funding with Security

  A holding company, "Apex Holdings," wants to provide a loan to one of its smaller, less established subsidiaries, "Innovate Solutions," to fund a new research and development project. To provide an added layer of security and to utilize a formal banking structure, Apex Holdings deposits 10 million euros with its primary commercial bank. The bank then issues a loan of 10 million euros to Innovate Solutions, with the loan's interest rate and repayment schedule directly tied to the terms of Apex Holdings' deposit. This structure ensures that the funds are formally channeled through a regulated financial institution, providing clear documentation and potentially better internal governance for the group.

  This demonstrates a back-to-back loan as Apex Holdings acts as the ultimate lender by placing a deposit, the bank serves as the intermediary, and Innovate Solutions is the ultimate borrower. The bank's loan to Innovate Solutions is directly backed by and mirrors the terms of Apex Holdings' deposit.

• Example 3: Private Investor Facilitating Project Finance

  A wealthy private investor, Ms. Chen, wishes to finance a promising renewable energy startup, "GreenFuture Energy," but prefers not to directly manage the loan administration or take on the full credit risk herself. Instead, Ms. Chen deposits $2 million into a special account at her bank. The bank, using this deposit as collateral and mirroring its terms, then extends a $2 million loan to GreenFuture Energy. The interest payments from GreenFuture Energy go to the bank, which then pays Ms. Chen interest on her deposit, effectively passing through the financing while the bank handles the legal and administrative aspects of the loan to the startup.

  This is a back-to-back loan because Ms. Chen is the ultimate lender, the bank is the intermediary, and GreenFuture Energy is the ultimate borrower. The bank's loan to GreenFuture Energy is directly linked to and secured by Ms. Chen's deposit, with the terms of both agreements being closely aligned.