THE NUMBER · CAPACITY · 1 OF 6
A company asks to refinance. Its year in four numbers:
- EBITDA
- US$6m
- Capex + tax
- US$2m
- Interest
- US$1m
- Principal due
- US$2m
// THE GROUNDWORK / B · THE LOAN25 FILES · ONE MINUTE EACH
THE IN-TRAY · THE GROUNDWORK · B
The Loan
On what terms?
The contract itself: how much it can carry, what protects it, what it costs, and how its risks are hedged.
// B1 · CAPACITY
THE FIRST QUESTION · CAPACITY · 2 OF 6
Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.
Is three times the same risk for both?
THE NUMBER · CAPACITY · 3 OF 6
A property investor collects US$2.4m of rent a year and spends US$0.4m running the building. Interest and principal on its loan come to US$1.6m a year.
What is its debt service cover?
THE CALL · CAPACITY · 4 OF 6
A US$35m loan was sized on EBITDA of US$10m. Halfway through the year, management cuts its forecast to US$7m.
What changes?
THE CALL · CAPACITY · 5 OF 6
A manufacturer wants a five-year loan for a machine. Its own appraisal shows a strongly positive net present value, but the machine saves little cash in years one to three and a lot in years four to eight.
What does the bank need to see?
THE NUMBER · CAPACITY · 6 OF 6
A US$2m machine is expected to save US$400k of cash a year. The borrower asks for a three-year loan to buy it.
How long does the machine take to pay for itself?
6 FILES · PICK A CALL ON ANY OF THEM
// B2 · PROTECTION
THE CALL · PROTECTION · 1 OF 7
A company with a US$25m senior secured bank loan and US$20m of unsecured notes fails. After the costs of the process, its assets realise US$30m.
Who gets what?
THE FIRST QUESTION · PROTECTION · 2 OF 7
A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.
Which is likely to show deterioration first?
THE FIRST QUESTION · PROTECTION · 3 OF 7
A food manufacturer's loan is secured by a floating charge over its stock and debtors and a fixed charge over its factory.
Which security can shrink without anyone breaching anything?
SIGNAL OR NOISE · PROTECTION · 4 OF 7
A borrower asks the bank to release its warehouse from security so it can sell it, saying the proceeds will 'strengthen the balance sheet'. The warehouse is a third of the bank's security.
Signal or noise?
THE FIRST QUESTION · PROTECTION · 5 OF 7
A wholesaler's stock is the bank's main security. Its main supplier's terms say goods remain the supplier's property until they are paid for.
What does that clause do to the bank's security?
THE CALL · PROTECTION · 6 OF 7
A borrower fails. The bank holds a floating charge over its stock and debtors. Employees are owed wages, and the tax authority is owed sales tax.
Who may be paid before the bank from those assets?
THE FIRST QUESTION · PROTECTION · 7 OF 7
A bank lends to a holding company whose only assets are shares in three operating subsidiaries. The subsidiaries have their own bank debt and trade creditors.
Where does the bank stand if a subsidiary fails?
7 FILES · PICK A CALL ON ANY OF THEM
// B3 · PRICE
THE NUMBER · PRICE · 1 OF 6
A US$10m loan. The bank estimates a 2% chance the borrower defaults within a year, and expects to lose 40% of what is owed if it does.
What is the expected annual loss?
THE CALL · PRICE · 2 OF 6
A borrower wants a five-year fixed rate. The bank funds itself at floating rates.
What has the bank taken on if it simply agrees?
THE NUMBER · PRICE · 3 OF 6
A US$20m loan. The bank expects to lose 0.5% of it a year on average. It must hold capital equal to 10% of the loan, and its shareholders expect 12% a year on that capital. Funding and running costs are priced separately.
What margin covers expected loss and the return on capital?
THE CALL · PRICE · 4 OF 6
A loan was priced two years ago, when the borrower was rated strongly. Its rating has since slipped two notches and its leverage has risen. The margin has not moved, and the relationship manager says repricing would upset a good client.
Your move?
THE NUMBER · PRICE · 5 OF 6
A company borrows at 8% a year. Its interest is deductible, and it pays tax at 25%.
What is its after-tax cost of this debt?
THE CALL · PRICE · 6 OF 6
A borrower's finance director says its weighted average cost of capital is 9%, so a project returning 11% creates value. The project is far riskier than the rest of the business.
What does the lender question?
6 FILES · PICK A CALL ON ANY OF THEM
// B4 · HEDGES
THE CALL · HEDGES · 1 OF 6
An importer with a floating-rate loan fears that rates will rise, and asks about an interest rate swap.
Before it signs, what does it most need to understand?
THE FIRST QUESTION · HEDGES · 2 OF 6
An exporter sells in euros and reports in US dollars. It has euro receivables worth about US$5m due in 90 days, and asks the bank for a forward contract.
What does the forward fix?
THE FIRST QUESTION · HEDGES · 3 OF 6
A borrower has a US$10m floating-rate loan and an interest rate swap fixing the rate on US$15m.
What do you ask first?
THE CALL · HEDGES · 4 OF 6
An exporter hedged next year's euro sales with forward contracts. Halfway through, its largest euro customer cancels, and half the hedged sales will not happen.
What does the exporter have now?
THE CALL · HEDGES · 5 OF 6
An importer must pay a supplier in euros in six months. Instead of a forward contract, its adviser suggests buying the euros today and depositing them until the payment is due.
What has that done?
THE FIRST QUESTION · HEDGES · 6 OF 6
A floating-rate borrower is offered two products: a swap that fixes its rate at 5%, or a cap that limits its rate to 6% for a fee paid upfront.
What is the difference that matters most?
6 FILES · PICK A CALL ON ANY OF THEM
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