Preparing Credit Proposal and Issues in Credit Analysis PT Bank ICBC Indonesia
Credit Proposal Outline 1. Executive Summary 2. Facility Overview 3. Transaction Analysis 4. Obligor Analysis 5. Financial Analysis 6. Risk Assessment 7. Conclusion and Recommendation 8. Appendices
What is Executive Summary 1. Summary of the complete proposal 2. Purpose for executive review and reading 3. No more than 2 pages, 1 page is best
Facility Overview 1. Key Terms and Conditions Type, amount, pricing, tenor, repayment, covenants, securities, condition precedents & subsequents, undertakings, shareholder control, etc 2. Account strategy and Profitability 3. Country and Industry Exposure 4. Others: Syndication Strategy and Update
Transaction Analysis 1. Purpose and Credit Justification 2. Transaction Structure Corporate Finance vs Project Finance LBO Cashflow Waterfall / Sweep Cash Account and Management Agreements (CAMA) Security and Seniority 3. Repayment Sources Analysis Primary & Secondary 4. Transaction Comparisons
Obligor Analysis 1. History and Background Shareholders and Development 2. Business Model and Revenues Structures 3. Infrastructures and Resources 4. Industry, Competition and Regulatory Environment 5. Ratings: External and Internal 6. Peers Comparison
Financial Analysis 1. Perfomance Analysis 2. Financial Structure and Liquidity 3. Projection and Analysis Summary & Conclusion Only Base Case Stress Cases
Risk Assessments 1. Risks Identification 2. Mitigations Analysis
Conclusion and Recommendation 1. SWOT Analysis 2. Obligor & Financial plus Facility Structure Analysis
Appendices 1. Contracts 2. Consultant Reports 3. Complete Termsheets 4. Projection Detail
Issues in Credit Analysis 1. Accounting Tricks 2. Seniority and Subordination 3. Leveraged Transaction 4. Covenants 5. Syndicated Loan
Accounting Tricks 1. Creativity with P&L to enhance results Temporary discount, inclusion of rising shares value Premature reveneus recognition of long term contracts = > increase AR One off gain of assets disposal 2. Capitalizing vs expensing and extended amortization Cost is capitalized e.g. R&D Years of depreciation instead of one off cost No impact on cashflow
Accounting Tricks 3. Mis reported assets & liabilities No writte off of impaired assets Non performing productive assets transfered to other assets Non consolidation of subsidiary loss Bad debt reserve 4. Creativity with cashflow statement Sales & lease back Loan disguised as investment
Seniority and Subordination Contractual Subordination Structural Subordination 1. Senior secured 2. Senior unsecured / Junior secured Upstream Holding Company Debt $500 Interest $30 Own Cashflow $0 3. Junior unsecured 4. Shareholder debt 5. Preferred equity 6. Ordinary equity Operating Subs Cashflow $50 Interest Exp $20 Dividend $30 Operating Subs Cashflow $20m Interest Exp $20m Dividend $0 Operating Subs
Leverage Transaction 1. LBO or Acquisition Finance Purchase of existing company, principally financed by debt Debt is cheaper than equity => tax effcient and high ROE Exit by trade sale, IPO, Sale to other LBO 2. Financing Structure Bank debt (50%) Bridge fund (20%) Mezzanine (15%) Sponsor equity (15%) Low target return Very high target return
Leverage Transaction Stable earning Low cyclicality Diversified High margin Low competition Asset intensive Mature infrastructure, utilities, some property, some mature industrials, some retail Leverage Suitability Biotech, house-building, airlines, semi-conductor, advertising related Cyclical, downturn vunerable Start-up Declining, competitive Low margin High investment High quality assets can support high leverage
Covenants 1. Change of control 2. Merger restriction 3. Limitation on debt incurrence 4. Negative pledge / limitation on liens 5. Limitation of sales / leaseback transaction 6. Limitation on subsidiary borrowings 7. Restricted payments
Syndicated Loan Company X Company X USD 100 m loan Principal + Interest USD 100 m loan Principal + Interest Facility Agent Bank A P + I Bank A P + I P + I A loan is made by two or more lending institutions, on similar terms and conditions, using common documentation and administered by a common agent Bank A Bank A Rationales: - Size - Diversification - Incomes P + I Bank A
Syndicated Loan Lead Arranger Reputation risk Market risk Credit risk Under writer Facility Agent Operation risk Reputation risk Roles & Risks Operation risk Credit Risk Lender Security Agent Reputation risk Legal Risk Operation risk Reputation risk Account Bank
Q & A