Downside case

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A downside case is the borrower's forecast rerun on deliberately harder assumptions — lower sales, thinner margins, slower collections, a higher interest rate — to see whether the loan still services and stays inside its covenants. The credit question is not whether the downside is likely but whether the facility survives it, and with how much room. The more informative version works backwards: the fall in earnings at which cover reaches its covenant or the facility runs out, which turns an argument about the right shock into a measure of the margin for error.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.