参考说明3404之家week4-corporate lending

1、Lecture 4:Corporate lendingReading: Sathye: Chapter Eight1Learning objectivesApply the principles of corporate lendingExplain the application of lending criteriaList the contents of the loan structuring proposalDiscuss the importance of financial informationExplain the importance of managing the loa

2、n portfolioDemonstrate awareness of available loan productsDiscuss the developments of project finance2IntroductionCorporate lending is still more of an art than a scienceCredit scoring techniques still being developed, although a percentage of loans will still go badWHY?The lifecycle of loans highl

3、ights differences between lending and corporate entities3An overview of corporate lendingMany issues in corporate lendingHigh end of the portfolio mix (Size & Specificity)Fiercely competitivePotential overexposure to segmentMust carefully follow lending criteria as principles of lending still applyW

4、hen taking risks, occasional losses are not only likely, but expected (Could write-off a loan portion by downgrading PV)4The purpose of corporate lendingAim is to grow loan book in a way that maximises shareholder wealthThe loan portfolioShould contain a good mix of interest rates, cashflows and mat

5、urities including:Diversification of asset mix, geographical composition and loan typesExpertise of staff in market segments (Real Estate experts), policy, competition elements, environmental issues (e.g. economic, demographic) and accept delegationAppropriate loans audit and review5The principles o

6、f corporate lendingLending is a risk/reward trade-off; must manage those risks wellEncourages corporations to include hurt money(their own capital) as first source of fundingJog your memory about certain risks by going through 5 Cs, eg, under Character, there may be risks of misappropriating money,

7、directors not putting in enough care & diligence, etc6Three overarching principles (Specific to Corporate lending)Safety Ability to repay the loanSuitability Purpose and amount of loan, hurt money and repayment scheduleProfitability Sufficient return on investment7Methods of lending assessmentTwo ke

8、y methods applied, namely:5 Cs and PARSER approachesWe have done this before, but you need to focus on the differences in application of the 5 Cs to corporate and personal lending85 CsCharacterThe character of a corporation very importantHow was company set up and by whom?What is the reputation of t

9、he company and its management?Does management have a good relationship with its bankers and stakeholders?9CapacityLender should consider not just the capacity to service the loan but also the capacity to borrowCollateralBorrower must demonstrate commitment to the project (True investment focus as op

10、posed to some forms of personal lending), and also provide ways out for lender105 Cs5 CsConditionsLender must consider internal and external forces likely to affect the projectCapitalRequires careful analysis of companys financials11PARSERPersonal elementAssesses the integrity, culture and ethics of

11、 the firm and its boardAmount requiredIs amount sufficient for the proposed purpose?RepaymentShould not be based solely on cashflows (2nd way out also)Need to consider trend analysis, detailed cashflow projections and alternative repayment options (Delayed & cash flow specific) considering the turno

12、ver of the firm12PARSERSecurityAssets supporting the loan representing a second or third way out for the lenderExpedienceHow does opportunity fit into the funding and target market segments of the lender? (eg; real estate lending in a growing, but not overinflated market)RemunerationDoes the loan fi

13、t well with the credit criteria determined by the credit committee?How profitable is the loan given the interest rate, application fees, commitment fees, etc?13The lending cycleCovers the birth (loan approval) to death (repayment) of the loanContains three key elements1 Origination2 Funding3 Managin

14、gThese elements may be further refined14The lending cycleIdentification/exploitation of target marketsSuccess of origination depends on finding clients and delivering the right productsEvaluating proposals via credit analysisSuccessfully negotiating terms/conditionsAdvising loan applicant of success

15、/failurePreparation and exchange of documentsDisbursement of fundsLoan administration and reviewDetermining if payments received on time15The lending cycleShould loan not performPrior planning should provide strategies to quickly handle adverse credit eventsIf remedial actions fail, appropriate cour

16、ses of action must be determinedWorkout SituationCan alternatives lead to increased recovery such as change repayment arrangements, exercise of liens over property, etc?Write-off outstanding amounts16Structuring the loan proposalIt should address the following questionsIs loan amount sufficient for

17、task?Is cash available and repayment identifiable?Is term of debt long (12 months) or short-term?17Structuring the loan proposalIf long-term, will cashflow projections support repayment and does purpose match term?If short-term, does asset conversion cycle and working capital allow repayment? (Think

18、 back to Altmans Z example last week)Does the borrower have seasonal funding requirements of is it hard-core debt?18Product structure and applicationPopular high-end products includeRevolving Credit: Flexible facility with a limit that may be drawn, repaid and used again (Could be used for seasonal

19、requirements)Standby Lines: Funds that may be drawn down when required with guaranteed access (Emergency)19Product structure and applicationRevolving underwriting facilities: Funds available on demand and reinstated on repaymentSyndicated facilities: Mixture of product offerings shared by multiple l

20、ending firmsProject finance: Specific funding for single large-scale projects20Structuring the loan proposalSmall Corporate EntitiesMarket segmented according to turnover, employee numbers, etc.Many have unaudited financial statements and financials must be treated with cautionLarge Corporate Entiti

21、esDifferent banking relationship due to direct access to global capital marketsRequires more innovative solutions to enhance corporate financing activities21Project finance characteristicsProject is distinct financial entityProject often highly geared (75% debt)Loans linked directly to projects asse

22、ts and cashflowsSponsors guarantees expire with projectEnd-users and suppliers may provide creditLenders recourse limited to projects assetsFinance generally longer-term22Credit rating agenciesCredit rating is a formal credit opinion provided by rating agency for financial marketsGenerally for large

23、 corporates and sovereign borrowersRatings used in conjunction with other credit criteriaFocus is on risk factors and fit in its market23Skills required of the loan officerAppropriate skill set includesUnderstanding loan portfolio complexitySubjective and objective in risk assessmentSound credit adm

24、inistration and record-keepingStrong focus on loan monitoring and credit judgmentTechnologically competent Clear thinker who is good at early problem recognition and decisive solution-finding24The importance of financial statementsAccounting, as with lending, is something of an artBehind the numbers

25、 lie key questionsAre financial statements and cashflow projections reliable?Are cashflows sufficient to sustain operations and ultimately repay debt?Will cashflows allow repayments to occur when required under loan agreement?25Managing the loan portfolioWhat can go wrong?30% of bad loans were unsou

26、nd when loan made facts missed or analysis was faultyApply this to the investment diversification graphMuch greater risk of errors in loan approval process than fraudRisks are External: Changes to regulations/legislation, technological, globalisation, economic, etc.Internal: Poor planning, organisation, profit planning/cost control and resource management26Advice from the pastWhat are some of the key lessons from experienced credit managers?Always try to work in a team for credit decisio