Review Questions 81Word文件下载.docx

Review Questions 81Word文件下载.docx

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8.1.9Writenotesoncreditratingsagencies.

8.1.10Pleaseanswerquestions1,2,5,10,11,12frompp.640-1ofKochandMacDonald

Chapter8:

CorporateLending

Solutionstodiscussionquestions

Q1.Whatarethethreemainprinciplesappliedtocorporatelendingproposals?

Aswithotherformsoflending,thethreeover-archingprinciplesofcorporatelendingare:

∙Safety:

asensuredbyemployingtheFiveCs

∙Suitability:

thattheloanislegalandconformsthebank’slendingpolicy

∙Profitability:

BenefitsandCostsaremeasurableanddefaultprobabilitycanbereasonablywellestimated

Withregardsuitability,notethatloanproceedsshouldbeusedforlegitimateoperatingexpenses.Theseinclude:

•Seasonalandpermanentworkingcapital

•Purchaseofdepreciableassets

•Physicalplantexpansion

•Acquisitionofotherfirms

•Extraordinaryoperatingexpenses

Unacceptableusesofloanfundsinclude:

•Speculativeassetpurchases

•Debtsubstitutions:

eg.usingloanproceedstorepayotheroutstandingdebts

Q2.ThefiveCsisonemethodofstructuringaloanapprovalprocess.Whatfundamentalpieceofinformationdoesitignoreorfailtohighlight?

A.Thepurposeoftheloanisnotimplicitlydiscussedordemanded

Q3.Whatarethethreecomponentsofacorporateloan?

A.Origination

Funding

Managing

Q4.Doyouthinkthatanunderstandingofthethreecomponentsnotedinquestion3wouldallowforacorrectsegmentationofloandutiesandfunctionswithinafinancialinstitution?

∙Allowsforthesegmentationofdutiesintothestatedfunctions

∙Allowsforlimitedtrainingtobeeffectiveacrossfunctions

∙Synergycanbeappliedtomanagementpracticesascentralisationcanoccur

∙Corporategovernanceisstrengthenedbecausethereislesspotentialtomanage（orcontrol）thewholeloanprocessandhencepotentialforfraudislessened

∙Theauditprocesscanbestrengthenedbecauseoftheseparationofresponsibilitiesandduties

Q5.Inrecommendingapprovalofaloan,howdoesaloanofficerreconciletheneedsoftheborrowerwiththebank’sobjectiveofmakingaprofit?

∙Attentiontoaprudentlendingprocesswillallowaloanofficertoidentifygoodloansthatmeettheneedsoftheinstitutionandassistclientstogrowtheirbusinesses.

∙Astheloanportfolioisusuallythemajorassetofalendinginstitutionqualityisparamounttosustainabilityofprofitandgrowth.

∙Effortstoreducebothtype1andtype2errorswillbenefitboththebankandborrowers.

Q6.Discusstheveracityandvalueofthelendingcycle.

Itisastructuredandprogressivecyclethatallowsforaloantobedeclinedorapprovedatanystage.Thecycleensuresthatduringtheanalysisandapprovalprocesstheloanofficerconsidersthefollowingaspects,someofwhicharedirectlyrelatedtotheloanandsomearerelatedtothestrategicthrustofthefinancialinstitution.

a.Targetmarket–thismustbeidentifiedintheplanningphase.Thelenderdefinesastrategyforsellingandensuresitsproductsareaccessibletothetargetedmarketsegments.

b.Origination（stage1）–findingclientsandmeetingtheirneeds.Manyinstitutionspaybrokerstobringthemnewcustomers.

c.Evaluation–formalprocessingoftheloanforveracity.Thecreditanalysisstage.ThisiswheretheFiveCs,riskanalysisetc.isemployed.Corporatelendinginvolveshigherriskandhigherrewardthanretaillending,sothisstageisveryimportant.

d.Negotiation–thelenderestablishestermsandconditionsandcovenantssoastomaximisethelikelihoodofmakingpositivereturnsfromtheloan.Thisistheoldrule“Yeewhohasthegoldwritestherules”.

e.Approval/decline-ifthecustomerisaccepted,theinstitutionformallyofferstheloanwithappropriateconditions.

f.Documentation–allrelevantpaper-workiscompletedandsignedbyallparties,meetingalllegalrequirements.

g.Disbursement–thepassingofthefunds.

h.Administration–Theongoingmonitoringoftheperformanceoftheloan.Majorpointsofreviewarerepayments,thehealthofthecorporation’sfinancials,adherencetocovenantsandthevalueofthecollateral.

i.Orderlypaymentandfinallyrepayment–thesuccessfulcompletionofthelifeofaloan.

Withacompetentlendingprocess,themajorityofloansshouldendatthispoint.However,someloanswillnotgoaccordingtoplan.Thequickertheresponse,thelesspotentialthereisformajordefault.Thefollowingactionsmaybeneeded:

j.Unforseennegativeeventsoccur:

1.workout–Renegotiatethetermsoftheloan;

enactliensoversecurity

2.write-off–Thelendingcycleishalted.Thelenderformalisesthelossbyanaccountingtransfer.OutstandingprincipalandinterestisdeductedfromtheFinancialPositionReserveforDoubtfulDebts.

ReviewQuestions8.1.2-8.1.8

1.Lookatthecompany’sHistory:

∙Howitwassetupandbywhom

∙Structure,operationsandinternalaccountability:

∙Isthefirmprivatelyorpublicallyheld?

∙Isthefirmasingleentityoraholdingcompanywithsubsidiaries?

∙Isitacorporationorpartnership?

∙Inwhatmarketsdoesitcompete?

∙Whatproductsandservicesdoesitprovide?

∙Bargainingpowerofbuyersandsellersthefirmdealswithetc.

2.Thisisfollowedbywritingabusinessandindustryoutlookreport.

3.Alsoconsider:

∙Companyreputation

∙Management:

background,experience,compensation,lineofsuccession

∙Qualityofrelationshipwithpastlenders

∙Dealingswithcustomersandsuppliers,and

∙Creditbureaurecords.

Forabusiness,thefourmainsourcesofcashflowtorepayloansare:

∙Liquidationofassets

∙Cashflowfromnormaloperations

∙Newdebtissues

∙Newequityissues

Forexample,seasonalworkingcapitalloansarenormallyrepaidfromtheliquidationofreceivablesorreductionsininventory.

Termloansaretypicallyrepaidfromthecashflowofnormaloperations.

Accountsreceivablefinancing（alsocalledinvoicediscounting）

∙Inaccountsreceivablefinancing,theADIlendsmoneyagainstanagreedpercentageofreceivablesthatareassignedtoit.Itisaformofcollateralisedlending.

∙Itisanongoingarrangementwiththemaximumdrawdownaround80%ofthesalesledger.

∙Theborrowingfirmcontinuesitsregularcreditandcollectionfunctionsanditscustomersarenotnotifiedoftheassignmentoftheirdebttothelender.Hence,ithasthebenefitofconfidentiality.

∙Collectionsareautomaticallypaiddownontheloanandnewloanfundsaregrantedasnewreceivablesaregenerated.

∙Itisdynamicinthatfinancingreactstoexpandingsalesthusenablinginventorybuild-up.

∙Itissimilartoanoverdraft,butgenerallyamoreexpensiveformofborrowing.

∙Generally,discounters（financecompanies）willreviewthecredithistoryandprofitsofthebusinessapplyingforthisformoffinanceandwillhavestrictrulesregardingthesalesledgersystemsandprocedures.

∙Originallydesignedformedium/largebusinesses,thissortoffacilityisnowofferedtosmall/mediumbusinesses.Bothrecourseandnon-recoursefacilitiesareavailable

Factoring

∙Infactoring,alenderactuallypurchasesselectedreceivablesfromaborroweratapercentageoffacevalue（discount）.

∙Theborrower’scustomersarenotifiedofthetransaction,andallpaymentsaresubsequentlyremitteddirectlytothelender.`1a

∙Financeisavailableonupto80-90%ofgoodqualityoutstandingreceivables.

∙Bankers’lienisagenerallien,sothelenderisinastrongerpositionthanthebusinessconcernedtocollectthedebt.

∙Beforepurchasingdebts,thelenderwillscrutinisethelistofdebtors,deleteanydebtsthatmaybehardtocollectandpurchasetheremainder.

∙Generally,thecustomerisrequiredtomaintainacashreserveagainstlossesthatmayarisefrombuyers’claimsagainstthecustomerfirm.

∙Inadditiontocorporates,factoringisoftenusedbysmallbusinessesornewfirmsthathavelimitedassetstoofferassecurityonatermloan.

∙Thefactorismoreconcernedwiththequalityofreceivablesthanthefirm’scredit-worthiness.

∙Traditionally,factoringhasnotinvolvedrecourse,i.e.,thefactorbearsthecostifanydebtorsfailtopay.Thatis,thefactorbearsthecreditriskandmustmakeaccommodationforthis.

∙Currentlyhowever,recoursefactoringhasbecomemorecommon–thefactorhasrecoursetothefirmifdebtsarenotpayedwithinaspecifiedperiodeg.90days.

Typically,thefactoringtransactionconsistsof3parts:

（i）theadvancefromthefactortotheseller,apercentageoftheinvoicefacevaluethatispaidtotheselleruponsubmission,（ii）thereserve,whichistheremainderofthetotalinvoiceamounthelduntilthepaymentbytheaccountdebtorisreceivedbythefactorand（iii）thefee,chargedbythefactorwhichisdeductedfromthereservepriort