Revolving Underwriting Facility (RUF)

What Is a Revolving Underwriting Facility (RUF)?

A revolving underwriting facility (RUF) is a form of revolving credit in which a group of underwriters agrees to provide loans if a borrower is unable to sell in the eurocurrency market. The eurocurrency market is a marketplace where lending currencies are held as deposits at banks outside of the countries that issue that currency as legal tender.

Loans are generally delivered through the purchase of short-term euro notes — promissory notes that are usually issued at a discount and typically mature within one month to six months.

How a Revolving Underwriting Facility (RUF) Works

A revolving underwriting facility (RUF) is a credit-granting entity that commits to the act of buying a borrower's unsold euro notes at a pre-determined price agreed upon by both parties at the time of the contract. This credit line offers an extra level of security to those who want to buy and borrow in the eurocurrency market, which operates in many global financial centers around the world — not just in Europe.

The facilitation of the RUF loan is through an agreement between the borrower and an underwriting bank. The underwriting bank presents the borrower with a fallback contingency if they cannot sell their euro notes. In this instance, the borrower would only owe interest on the amount borrowed.

Loans facilitated by a revolving underwriting facility (RUF), provided through the purchase of short-term euro notes, have a maturity (or repayment date) of six months or less.

A single bank will usually manage the revolving credit aspect of this agreement, serving the role of the arranger. As the arranger, they perform a marketing role in selling the euro notes, while also taking on a small portion of the financing — typically less than 10%.

Benefits of a Revolving Underwriting Facility (RUF)

Many of the same aspects of the eurocurrency market that make it so exciting and appealing to borrowers and investors are also the things that can present an increased level of risk.

The main benefit of a revolving underwriting facility is the ability to circumvent regulatory requirements, tax laws, and interest rate caps often involved in domestic banking. Because the eurocurrency market is competitive and less regulated than the United States, it can simultaneously offer lower interest rates for borrowers and higher interest rates for lenders.

On the downside, less regulation also brings with it greater risks, particularly during a run on the banks. This uncertainty is precisely what makes revolving underwriting facilities (RUFs) so appealing. In exchange for a fee, credit-granting entities can offer a valuable safety net, providing borrowers with support that would help them avoid, or at least minimize, some losses in the often-unpredictable eurocurrency market.

Revolving Underwriting Facility (RUF) vs. Note Issuance Facility (NIF)

Both a revolving underwriting facility (RUF) and a note issuance facility (NIF) provide short- to medium-term credit in the eurocurrency market. Where they mainly differ is that a NIF purchases the outstanding notes that failed to sell in a planned issuance, rather than offering loans.

NIFs were particularly prominent in the 1980s. When they do not include the underwriting component that a revolving underwriting facility (RUF) offers, they are sometimes known as euro‐commercial paper (ECP) programs.