ON THE DESKFREE EDITORIAL · COMPOSITE TEACHING CASES
On the desk.
You're on a lending desk, first book or fifteenth year, and want your read against a senior's.
14 CASES · 3 TOOLS · 22 GUIDES
THE TOOLS
THE CRAFT
- Learning Map Every module, with a fileA commercial credit learning map sets out the subjects every lending course covers — reading the accounts, working capital, repayment capacity, leverage, quality of earnings, security and covenants, the borrower's industry, management and forecasts, the credit decision, monitoring, and the bank around it.
- Cash Flow Analysis A lender reads cash before profit, because profit is the output of judgment calls and operating cash flow is largely mechanical: what came in from customers, what went out to suppliers, staff and the tax office.
- Working Capital Requests A bank assesses a working capital request by sizing the need from the business's own cash cycle before it reads the amount asked for.
- Working Capital Case Study A working capital case study asks one question of a working capital request: is it funding growth, or funding a deterioration?
- Writing a Credit Paper A credit paper — a credit memo in American banks — is the document that puts a lending decision in front of the person or committee with the authority to make it.
- Debt Service Coverage (DSCR) The debt service coverage ratio (DSCR) divides the cash a business has available to pay its lenders by what it owes them in the same period — interest plus scheduled principal.
- Leverage and Capital Structure Debt to EBITDA divides a business's debt by its EBITDA — how many years of earnings the debt represents — and is the leverage measure most lending appetite is written in.
- LVR, Security and Collateral The loan to value ratio (LVR) divides a loan, with any debt ranking ahead of it, by the independently valued asset securing it — the margin by which the value can fall before the security stops covering the debt.
- How Banks Price a Loan A bank prices a business loan by adding up what the loan costs it to hold: funding for the loan's term, the loss it expects on average from loans like it, a return on the capital it must keep against worse-than-expected losses, the cost of assessing and watching the loan, and a profit.
- Problem Loans and Workout A problem loan is one whose first way out — the borrower's own cash flow — is failing.
- Property Development Finance A bank reads a development loan backwards, from the developer's margin to everything that could take it away.
- Drawing a Development Loan A development loan is drawn month by month against certified work.
- Agricultural Lending A bank reads a farm loan by working out the price the farm needs to break even and setting it against a poor season, because the farm does not choose the price it is paid.
- When the Milk Price Falls Where milk is paid on a forecast, as in New Zealand, the season is budgeted on that price and paid in instalments, so a mid-season cut reduces every payment still to come while the early costs are already spent.
- Cash Conversion Cycle The cash conversion cycle is debtor days plus inventory days minus payables days: the number of days a business must fund between paying its suppliers and being paid by its customers.
- Temporary or Permanent Working Capital A working capital need is temporary when the borrowing comes back as the cycle turns, and permanent when a core balance never clears.
- Testing Borrower Forecasts The first test is not applied to this forecast but to the last one: what the same management projected two years ago against what arrived, because accuracy is a property of the forecaster before it is a property of the spreadsheet.
- Management Quality Management quality sounds like a judgment about people and is read as a record.
- Portfolio Manager vs RM In commercial banking a portfolio manager is a credit role, not an investment one.
- RM Scorecard A commercial banking relationship manager is evaluated on a scorecard that mixes what they bring in with what it turns into.
- Banking Toolkits From US$19
- Manufacturing Banking Toolkit
- Trade & Export Banking Toolkit
// SUBSCRIBE
The Lab.
One case file and one question, in your inbox every Tuesday morning, New Zealand time. The senior banker's read opens only after you answer.
FREE WITH IT · ANNOTATED PDF
A complete credit paper on a published file, with the approver's notes on what each section has to answer.
No spam. Unsubscribe anytime. Educational content only.