Thirty days

A distributor's EBITDA rose from US$4.0m to US$5.1m. The CFO's bridge adds back US$0.9m of 'one-off' restructuring costs. There have been restructuring costs in each of the last three years.

What do you ask first?

A company asks to refinance. Its year in four numbers:

EBITDA

US$6m

Capex + tax

US$2m

Interest

US$1m

Principal due

US$2m

What is its debt service cover, on cash available after capital spending and tax?

A bank funds 60% of its loans from household deposits and 40% from wholesale markets that roll every three months. Wholesale rates have just jumped.

Signal or noise?

Late in a long expansion, rival banks are lending on looser terms: fewer covenants, longer interest-only periods. A strong borrower asks you to match.

Your move?

Over lunch, one of your clients asks about a competitor that is also your client: 'I hear they're struggling. Are they?'

Your answer?

A wholesaler asks to size its working capital line.

Debtor days

55

Stock days

70

Creditor days

40

Sales a day

US$100k

What is its cash conversion cycle?

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?

A bank has US$10bn of loans: half to companies, half home mortgages. Suppose the capital rules weight company loans at 100% and these mortgages at 35%.

What are its risk-weighted assets?

The yield curve has inverted: two-year government rates now sit above ten-year rates.

Signal or noise, for a lender?

A borrower whose loan you are about to recommend sends you two tickets to a final, worth about US$1,000.

Your move?

A retailer adopts a new lease standard. Its balance sheet now shows US$40m of lease liabilities that used to sit only in the notes, and its debt to EBITDA moves from 1.5 to 3.8 times overnight.

What changed in the business?

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?

A bank's problem loans rose from 1.2% to 2.0% of its book. Provisions held against them are unchanged in dollars. Profit is up.

What do you ask first?

A furniture importer buys in euros and sells in US dollars at fixed list prices. The dollar has fallen 15% against the euro.

Where does the fall show first?

A listed borrower tells you in confidence that it will announce a large loss next week. A friend asks whether they should sell their shares in it.

Your move?

Two printers each make US$2m of operating profit on US$20m of sales. One owns its presses and its costs are mostly fixed; the other rents capacity by the job and its costs are mostly variable. Sales fall 20% at both.

Whose profit falls further?

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?

A bank's loans reprice every five years on average; its deposits reprice within one. Rates rise by one percentage point tomorrow.

What happens to its net interest income next year?

An office building earns US$1.0m a year of net operating income. Buyers price such buildings at a 5% yield, so it is valued at US$20m. The loan against it is US$12m.

If the yield buyers want rises to 6%, what is the loan-to-value?

A small exporter asks for a currency hedge. The product that pays the bank most is a complex option strategy; a simple forward would meet the client's need.

What do you offer?

Three borrowers send accounts. One set is audited, one was reviewed by an accountant, and one was compiled from the owner's records.

What does each tell you about how far the numbers were checked?

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?

A bank treasurer tells the credit committee: 'Deposits grew nicely this quarter — mostly from a few large corporate customers.'

What should the committee hear?

Two borrowers each grew profit 30% last year: a supermarket chain and a builder of new homes.

Whose profit do you expect to fall further in a recession?

A café client starts depositing cash several times a week, each deposit just under the amount that would trigger a report. Its turnover hasn't changed.

Signal or noise?

A contractor recognises revenue as work progresses. This year its revenue rose 20%, cash received from customers rose 3%, and the 'contract assets' on its balance sheet doubled.

Signal or noise?

A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.

Which is likely to show deterioration first?

Two loans earn the same margin. One is a company loan that needs three times the capital of the other, a well-secured home loan.

Which earns the bank more on its capital?

A borrower's loan is at a floating rate. It was sized when base rates were 2%; they are now 6%.

What does the bank re-test first?

A colleague in corporate finance asks to see the management accounts of one of your lending clients, 'to get a feel for the sector'.

Signal or noise?