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Multiple Option Facility (MOF)

The multiple option facility otherwise known as MOF is a
flexible method of tapping the money markets for short-term funds. This is similar to commercial paper since the money can only be borrowed for a short time frame, however the MOF does provide the facility for funds to be rolled over. So for example if one fund falls due after a certain period another loan can be taken out to replace it. Commercial property companies can can raise an MOF for about £25 million and up.

The MOF can provide cheap funds because it encourages banks to compete to provide loans on favorable terms. The M
OF can take a number of different structures but the most common form is the two part structure known as the guaranteed or committed facility and the unguaranteed and uncommitted facility. The unguaranteed or uncommitted facility usually allows the property company to borrow at more favorable terms.
To give an example of how a MOF works consider a property company say Focusnet which wants to borrow say £100 million pounds. This would mean that Focusnet could only have 100 million outstanding at at any given time (with a life of say 4 years). Focusnet could then instruct a bank to set up the facility for it. The instructed bank would then set a syndicate of banks who agree that jointly they will provide up to a total  £100 million if called upon to do so. The interest rate would be agreed at this point and would often be quoted at a margin over LIBOR. So lets say that Focusnet gets a quote of 20 basis points above LIBOR and lets say the LIBOR rate is 5% then the lending rate would be 5.20%. Borrowing costs will rise and fall with the movement of LIBOR but the highest amount the company pays in relation to LIBOR stays constant.

However an important point is that the highest amount quoted will not necessarily be the highest amount that the company will pay and the reason forr this is due to the second part of of the MOF which is the uncommitted facility. In the second part of the MOF facility the arranging bank puts together a tender panel which will add some banks into the original syndicate that agreed to the committed facility. When Focusnet wants to borrow the tender banks are invited to bid to provide the money. Those offering the cheapest rates will lend the money. If the banks in the tender do not provide the money ney or provide the money at a to expensive rate for Focusnet. Then Focusnet can fallback on the committed facility and borrow at 5.20%. However in the end Focusnet gets the funding that it needs.
This 2 part system has a number of advantages for the commercial property company, because it produces competition for the lending banks. In the uncommitted part Banks which are flush with cash at the time the money is required can bid to put up the money. Those that are not flush with can choose not to bid. The cost of the uncommitted funds will usually be lower than the cost of the committed funds because the tender banks are not required to supply the loan whether it is convenient or not for them.
In certain cases
the limit on the uncommitted facility will be the same as on the committed facility. Sometimes the uncommitted facility will be larger. So for example the committed facility can be £100 million  pounds and the uncommitted facility can be £125 million pounds. Therefore the highest amount it can borrow is £125 million but the property company is not guaranteed more than £100 million.
The Multple Option in the the name Multiple option facility refers to the ability of the property company to borrow money in multiple forms and can pick the type which is the most suitable or offers the cheapest rate at the time.
at the time.
Sometimes a commercial paper facility is included in the MOF (if you are not sure what a commercial paper facility is, then check out the commercial paper page on this website.) But a another variation is to set up the commercial paper function separately. So that the MOF can provide a backup if the commercial paper function cannot be renewed. The costs of the MOF can be calculated by adding up all the fees involved. There will be upfront fees payable to the arranging bank which is often expressed as a rate over the life of the loan and there is also an underwriting fee for the banks which provide the committed facility.
the end result is that the property company hopes that the tender panel will be able to provide funds at a cheap rate and that the company will not need to draw on the committed facility. Sometimes there is also a utilisation fee if it does in fact draw more than a certain portion of the committed facility. This is actually a protection mechanism for the banks, to account for unforseen events. To illustrate lets say that a property companies credit rating takes a hit and it is unable to raise any funds in the uncommitted
way, the only way it can then raise funds would be through the committed way so the utilisation fee could be a way for the committed banks to protect them selves from a borrower with a suddenly damaged credit rating.ime.