Parallel Loan
Categories: Banking
You run a U.S. company that sells a line of flavored socks. Like, socks you wear on your feet, except that, when you taste them, they have various flavors. You have a subsidiary in Canada (where your best sellers are the maple syrup and cheese curd models). You want to get a loan for your Canadian operation, but the fact that you are a U.S. company might cause regulatory issues that you'd rather avoid.
One solution: a parallel loan. In this strategy, you would find a Canadian company with a U.S. subsidiary. Then you would borrow money in the U.S., and lend those U.S. dollars to the other company's U.S. division. At the same time, the Canadian company would borrow money in Canadian dollars and loan those funds to your Canadian subsidiary. So you're borrowing money to lend to their subsidiary, while, simultaneously, they borrow money to lend to your subsidiary. Each of the companies is borrowing money in its home currency and keeping the money in the same country; the reciprocal agreement avoids any cross-border dealing. The setup avoids any international regulatory issues, as well...though, obviously, it creates a somewhat convoluted structure.
The process first became (relatively) popular in the UK during the 1970s. However, times have advanced enough that this level of rigmarole is usually unnecessary today. Rather, companies will simplify things with a currency swap instead.
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