3. Learning Objectives
• Apply the principles of corporate
lending
• Explain the application of lending
criteria
• List the contents of the loan
structuring proposal
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4. Learning Objectives
• Discuss the importance of financial
information
• Explain the importance of managing
the loan portfolio
• Demonstrate awareness of available
loan products
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5. Introduction
• Corporate lending is still more of an
art than a science
• Credit scoring techniques still being
developed, although a percentage
of loans will still go bad
• The lifecycle of loans highlights
differences between lending and
corporate entities
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6. An Overview of
Corporate Lending
• Many issues in corporate lending
– High end of the portfolio mix
– Fiercely competitive
– Potential overexposure to segment
– Must carefully follow lending criteria
as principles of lending still apply
– When taking risks, occasional losses
are not only likely, but expected
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7. The Purpose of
Corporate Lending
• Aim is to grow loan book in a way that
maximises shareholder wealth
– The Loan Portfolio
• Should contain a good mix of interest rates,
cashflows and maturities including:
– Diversification of asset mix, geographical
composition and loan types
– Expertise of staff in market segments, policy,
competition elements, environmental issues (e.g.
economic, demographic) and accept delegation
– Appropriate loans audit and review
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8. The Principles of
Corporate Lending
• Lending is a risk/reward trade-off;
must manage those risks well
– Encourages corporations to include ‘hurt
money’ as first source of funding
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9. The Principles of
Corporate Lending
– Three Overarching Principles
• Safety – Ability to repay the loan
• Suitability – Purpose and amount of loan,
hurt money and repayment schedule
• Profitability – Sufficient return on
investment
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10. The Principles of
Corporate Lending
• Methods of lending assessment
– Two key methods applied, namely the 5 Cs
and PARSER approaches
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11. The Principles of
Corporate Lending
– 5 Cs
• Character
– The character of a corporation very
important
– How was company set up and by whom?
– What is the reputation of the company and
its management?
– Does management have a good relationship
with its bankers and stakeholders?
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12. The Principles of
Corporate Lending
• Capacity
– Lender should consider not just the
capacity to service the loan but also the
capacity to borrow
• Collateral
– Borrower must demonstrate commitment
to the project and also provide ways out
for lender
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13. The Principles of
Corporate Lending
• Conditions
– Lender must consider internal and
external forces likely to affect the
project
• Capital
– Requires careful analysis of company’s
financials
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14. The Principles of
Corporate Lending
– PARSER
• Personal Element
– Assesses the integrity, culture and ethics of the
firm and its board
• Amount Required
– Is amount sufficient for the proposed purpose?
• Repayment
– Should not be based solely on cashflows
– Need to consider trend analysis, detailed
cashflow projections and alternative repayment
options considering the turnover of the firm
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15. The Principles of
Corporate Lending
• Security
– Assets supporting the loan representing a
second or third way out for the lender
• Expedience
– How does opportunity fit into the funding and
target market segments of the lender?
• Remuneration
– Does the loan fit well with the credit criteria
determined by the credit committee?
– How profitable is the loan given the interest
rate, application fees, commitment fees, etc?
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16. The Principles of
Corporate Lending
• The Lending Cycle
– Covers the birth (loan approval) to
death (repayment) of the loan
– Contains three key elements
• 1 – Origination
• 2 – Funding
• 3 – Managing
– These elements may be further refined
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17. The Principles of
Corporate Lending
• Identification/exploitation of target markets
• Success of origination depends on finding
clients and delivering the right products
• Evaluating proposals via credit analysis
• Successfully negotiating terms/conditions
• Advising loan applicant of success/failure
• Preparation and exchange of documents
• Disbursement of funds
• Loan administration and review
• Determining if payments received on time
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18. The Principles of
Corporate Lending
– Should loan not perform
• Prior planning should provide strategies to
quickly handle adverse credit events
• If remedial actions fail, appropriate courses
of action must be determined
• Workout Situation
– Can alternatives lead to increased recovery
such as change repayment arrangements,
exercise of liens over property, etc?
• Write-off outstanding amounts
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19. The Principles of
Corporate Lending
– Structuring the Loan Proposal
• It should address the following questions
– Is loan amount sufficient for task?
– Is cash available and repayment
identifiable?
– Is term of debt long (>12 months) or
short-term?
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20. The Principles of
Corporate Lending
– If long-term, will cashflow projections
support repayment and does purpose
match term?
– If short-term, does asset conversion
cycle and working capital allow
repayment?
– Does the borrower have seasonal
funding requirements of is it ‘hard-core’
debt?
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21. The Principles of
Corporate Lending
– Small Corporate Entities
• Market segmented according to turnover,
employee numbers, etc.
• Many have unaudited financial statements
and financials must be treated with caution
– Large Corporate Entities
• Different banking relationship due to direct
access to global capital markets
• Requires more innovative solutions to
enhance corporate financing activities
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22. The Principles of
Corporate Lending
– Product Structure and Application
• Popular high-end products include
– Revolving Credit: Flexible facility with a
limit that may be drawn, repaid and used
again
– Standby Lines: Funds that may be drawn
down when required with guaranteed
access
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23. The Principles of
Corporate Lending
– Revolving Underwriting Facilities:
Funds available on demand and
reinstated on repayment
– Syndicated Facilities: Mixture of
product offerings shared by multiple
lending firms
– Project Finance: Specific funding for
single large-scale projects
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24. The Principles of
Corporate Lending
– Project Finance Characteristics
• Project is distinct financial entity
• Project often highly geared (75% debt)
• Loans linked directly to project’s assets
and cashflows
• Sponsor’s guarantees expire with project
• End-users and suppliers may provide credit
• Lender’s recourse limited to project’s assets
• Finance generally longer-term
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25. Credit Rating Agencies
• Credit rating is a formal credit
opinion provided by rating agency
for financial markets
• Generally for large corporates and
sovereign borrowers
• Ratings used in conjunction with
other credit criteria
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26. Skills Required of
the Loan Officer
• Appropriate skill set includes
• Understanding loan portfolio complexity
• Subjective and objective in risk assessment
• Sound credit administration and record-
keeping
• Strong focus on loan monitoring and credit
judgment
• Technologically competent
• Clear thinker who is good at early problem
recognition and decisive solution-finding
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27. The Importance of
Financial Statements
• Accounting, as with lending, is
something of an art
– Behind the numbers lie key questions
• Are 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?
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28. Managing the Loan Portfolio
• What can go wrong?
• 30% of bad loans were unsound when loan
made – facts missed or analysis was faulty
• Much greater risk of errors in loan approval
process than fraud
• Risks are
– External: Changes to regulations/legislation,
technological, globalisation, economic, etc.
– Internal: Poor planning, organisation, profit
planning/cost control and resource management
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29. Advice from the Past
• What are some of the key lessons
from experienced credit managers?
• Always try to work in a team for credit
decisions
• Allow sufficient time for reasoned decisions
• Verify ALL facts and figures
• Segregate the selling and approval of loans
• Be firm with the client and don’t be forced
into bad decisions
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30. Advice from the Past
• Never promise what you cannot deliver
• Always consider client’s quantitative AND
qualitative aspects
• Volume is not necessarily profit. The client
must also add to profitability
• The purpose of the loan should also indicate
the repayment ability
• Visiting client’s firms adds to your
understanding and allows business creation
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31. Advice from the Past
• Record all relevant facts as soon as
possible, and not from memory, as files
may become evidence
• Try to confine client dealings to
professional matters only
• Timely and careful gathering of information
• Be proactive, not lazy and reactive
• All loans should provide at least two ways
out – cashflows and security
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