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Credit Analysis

PURPOSE

WHAT IS THE PURPOSE OF THE LOAN?
Acquisition of fixed assets? (Long term need)
Financing of inventory of receivables? (Probably term need)
Seasonal increase in current assets? (Short term)
Replacing existing debt? (Why?)
New Venture? (Caution!)
Other? (Give details)


BACKGROUND

WHO IS THE BORROWER?
Holding company? Operating company?
Member of a group?
Who are the shareholders?
Brief history of company (note credit record)
Who are other creditors?


QUALITATIVE ANALYSIS

THE INDUSTRY
What is the outlook for the industry?
Is it overcrowded? Is there now (or potentially) excess capacity?
Are there barriers to entry?
Is it contracting or growing?
Is it cyclical (boom / bust) industry?
What are the criteria for success in the industry?
Is there government preference for the industry?
What is the competitive position?
Who are the major players?
What are the key industry risks?
(Provide further detail in “Major Credit Risk” section)

THE BORROWER
What is its competitive position? (Market leader ? Small Market share?)
Who are key suppliers?
Who are key buyers? Are they widely spread?
Has the company established government and other relationships?
Measure company against “Industry criteria for success”

CHARACTER
What is reputation for meeting letter and spirit of commitments?
How important is “reputation of integrity” to borrower?
Can we got “testimonials” in support of above?
Are owners cooperative (e.g. in providing information )?

MANAGEMENT
Experience / track record (especially in economic downturns)
Key man risk?
Depth of management (e.g. quality of middle management)
What are major strengths and weaknesses?
e.g.-sales / marketing
-finance
-operations
-etc.
Age and health of key officers
Quality of information provided to bank
Is management conservative? Aggressive? Precarious?

PRODUCTION CAPABILITY
Factory / Plant Information


QUANTITATIVE ANALYSIS

OVERVIEW OF FINANCIALS
Who is auditor?
Any change in auditor? Why?
Any qualification in auditor’s report?
Seasonal fluctuations : What happens to company between balance dates? Is balance date representative of the rest of the year?
Are there unusual of noteworthy accounting policies?
Are there off balance sheet items (leases, contingent liabilities etc.)
Whose financials are we analysing? Parent? Consolidated? Are there unconsolidated subsidiaries or affiliates of importance? To what extent are the cash flow and assets implied by the financials accessible by the bank?

WORKING CAPITAL
Trends in:
-current ratio
-quick asset ratio
-days inventory
-days receivable
-days payables
Why have ratios changed? What do thay tell us about prospects for repayment? Give industry comparisons
If working capital is negative, how will company survive?
How liquid are current assets? What is quality of inventory, receivables?
Availability of credit lines and other sources of funds

BORROWING STRUCTURE
Trends in:
-leverage
-interest cover
Why have ratios changed? What do they tell us about prospects for repayment? Give industry comparisons
Are funding needs and sources well matched (or are long term needs being met from short term sources)?
Are currencies of borrowings appropriate?

PROFIT AND LOSS
Trends in:
-sales growth
-gross profit margins
-net profit margins
Note maintainable or recurring income versus exceptional or unusual items (such as FX gains / losses, sale of fixed assets or investments, etc.)
Why have ratios changed? What do they tell us about prospects for repayment? Give industry comparisons

CASH FLOW
Trends in net operating cash generation (and its compoments)
Can the company fund itself from operating cash flow?
How is surplus cash flow used? (Debt reduction? Dividends? Sidestreaming? Asset purchases? Other?)

PROJECTIONS
Evaluate credibility of underlying assumptions
Conduct sensitivity analysis, e.g. on
-sales levels
-costs and margins
-interest rates
-currency movements
-funding needs (days inventory, days receivable, days payables, etc.)
-other as appropriate
Is management equipped to handle projected growth? Does all of the above realistically indicate a dependable first way out?


SECURITY

WHAT IS OUR SECURITY?
How saleable is it? Are there any impediments to sale? Are we equipped to liquidate it?
What is its value:
-on a going concern basis?
-on a liquidation basis? (Be conservative and realistic !)
Is the security specialized in nature?
Is insurance adequate?
Are all our facilities cross collateralized?
Does all of the above realistically indicate a dependable second way out?


MAJOR CREDIT RISKS

ADDRESS WHICHEVER ARE RELEVANT. EXPLAIN HOW RISK AREAS ARE ADEQUATELY “BOXED” , OR REPRESENT FAIR COMMERCIAL RISK.

Macro risks e.g.
-reduced growth
-reduced government spending
-devaluation or revaluation of Baht
-other currency movements
-higher interest rates
-deregulation
-anti-inflation measures
-other changes in government policies
-protection by importing countries
-infrastructural bottlenecks
-political shifts impacting owners
-other as appropriate

Micro risks e.g.
-competitive pressures (loss of market share)
-withdrawal of credit (by suppliers or banks)
-labour strikes
-unavailability (or increased cost) of materials
-stretching of receivables impacting cash flow
-failure of key buyer
-obsolescence of inventory
-death of key manager
-fraud or sidestreaming
-others a appropriate


SUMMARY

CONFIRMATION OF AT LEAST TWO DEPENDABLE WAYS OUT.
RECOMMENDATION.