When lending money to a company, what characteristics do you look at to make sure that you are gonna be paid? Thank you.
I’m not a credit analyst, but capital structure quality and cash flow expectations have to be at the top of the list. Obviously, lending to a company with negative tangible equity and weak FCF is probably not going to be a good idea. You would much rather lend to a cash flow machine that has solid hard assets that can be resold if worse comes to worst. Also, some sense of how sticky the sales are and how cyclical the company is can help inform the expectations for FCF – if you are lending to an auto maker or some other deep cyclical, it can be hard to model since you don’t really know how far sales can fall. It gets a lot more complicated that my extremely simple example, but that’s the gist of it.
Thank you, what kind of FCF?
storko Wrote: ------------------------------------------------------- > Thank you, what kind of FCF? … the free kind? FCF = free cash flow, also known as CFFO (cash flow from operations) - Capex FCF is representative of the amount of cash left over after the company pays its necessary capital expenditures, so as a lender you would want to understand what level of maintenance capex a company has (lowest amount they can reasonably spend to keep the business up and running) so that you can get a sense of what the FCF might be when sales decline (and therefore CFFO declines).
bromion Wrote: ------------------------------------------------------- so that > you can get a sense of what the FCF might be when > sales decline (and therefore CFFO declines). This is assuming no working capital benefit to CFFO as a company potentially burns through the book as sales decline.
i ask for a copy of their driver’s license and the name of their childern and what school they attend… I usually have no problems getting my money back.
do you also pretend to have either a heavy russian or italian accent? that normally does the job for me.
Character: What kind of business it is. Is it a fundamentally good business to be in? For example, banks hate lending to restaurants and night clubs because they are too risky. Tenure and experience of the management. Are we dealing with deadbeats and incompetent people? Capacity: Do you number crunching to make sure they can service the debt. Profitability is one thing, cash flow is another. Banks love to see strong cash flows because they don’t get paid by profitability; they get paid by cash. Covenant: structure the deal so that the bank won’t get screwed. Make sure the deal proposed works. Set forth clear expectations. Collateral: In lending, you get paid by business cash flow. But make sure you always have a 2nd way to get paid. If $hit hits the fan, you can always go after collateral. Make sure the collateral is there and have sufficient value. If things don’t work out, you will have to send out the leg-breakers to help cover your losses. Italian accent is optional. But being quick with a shank will definitely help you get your money back more easily.
Compare their credit metrics to some of their peers. Adjustments may need to be made dependeng on the type of business.
$tarving_Banker Wrote: ------------------------------------------------------- > Character: > What kind of business it is. Is it a fundamentally > good business to be in? For example, banks hate > lending to restaurants and night clubs because > they are too risky. > Tenure and experience of the management. Are we > dealing with deadbeats and incompetent people? > > Capacity: > Do you number crunching to make sure they can > service the debt. Profitability is one thing, cash > flow is another. Banks love to see strong cash > flows because they don’t get paid by > profitability; they get paid by cash. > > Covenant: > structure the deal so that the bank won’t get > screwed. Make sure the deal proposed works. Set > forth clear expectations. > > Collateral: > In lending, you get paid by business cash flow. > But make sure you always have a 2nd way to get > paid. If $hit hits the fan, you can always go > after collateral. Make sure the collateral is > there and have sufficient value. If things don’t > work out, you will have to send out the > leg-breakers to help cover your losses. > > Italian accent is optional. But being quick with a > shank will definitely help you get your money back > more easily. The Four C’s. That look awfully familiar to me. Did you get your training with Wachovia?
ConvertArb Wrote: ------------------------------------------------------- > i ask for a copy of their driver’s license and the > name of their childern and what school they > attend… I usually have no problems getting my > money back. Do you prefer the tire iron or the baseball bat?
ws Wrote: ------------------------------------------------------- > The Four C’s. That look awfully familiar to me. > Did you get your training with Wachovia? Nope. Got it from another bank. I think L2 fixed income has a section on this too.
Ha, I was briefly a commerical banker with Wachovia, that was what they taught in their “formal credit training”. Yes, LII was way better/deeper.
Everything was covered, in terms of ho to write the deal, but the most essential analysis was left out. First and foremost you need to figure out what they need the money for, cyclical operations (then you would be giving out an operating line or a revolving term loan, which would have to be secure by their A/Rs and inventor) if the company is using the money for longer term purchases or equipment or something else in the simialr category you would go with a term loan and for that you would look at the companies non current assets and see if you can find some security there. For the longer term, you might want to ask the company to provide you with projections, you might want to down case those projections (stress test them, as some would say) Take the projections and figure out if they are reasonable, as the company to provide assumptions etc. I would write more but i gotta run for a meeting, b back in an hour…if you have any questions feel free, will answer then
$tarving_banker there aren’t many of us (bankers) on the forum- what market do you serve; middle? Corp? Small?~ sounds like with the type of credit background it would be small to middle business banking? In any case cheers sounds like we booth took the same classes-same company?
adalfu Wrote: ------------------------------------------------------- > do you also pretend to have either a heavy russian > or italian accent? that normally does the job for > me. Bonus points if you can pick up the phone, and fake a serious-sounding conversation in one of those languages with a slight hint of anger.
Storko - typical credit metrics include leverage, senior leverage (i.e. bank debt), interest coverage, and fixed cost coverage. Typically lenders are concerned with two things: 1) ability to service debt (i.e. what is EBITDA, FCF, and funds available from other liquidity sources such as equity issuance, asset sales, etc) 2) coverage and colleteral in case of default (i.e. are the assets worth enough to cover the debt AND what is the likelihood that you, the lender, can get your hands on those assets/collateral)
Storko, refer to your level 2 cfa book 
Mannyg86 Wrote: ------------------------------------------------------- > For the longer term, you might want to ask the > company to provide you with projections, you might > want to down case those projections (stress test > them, as some would say) I’ve been looking at a lot of companies lately that “stress tested” their top line down 15-20% in a recession. That looks more than a little foolish these days. It’s shocking how poor some of the lending was.
Dewey Wrote: ------------------------------------------------------- > $tarving_banker there aren’t many of us (bankers) > on the forum- what market do you serve; middle? > Corp? Small?~ sounds like with the type of credit > background it would be small to middle business > banking? In any case cheers sounds like we booth > took the same classes-same company? I joined my bank in 2008 with the intention of becoming a middle market banking analyst. Then it all went to hell and now I am in special assets looking at toxic loans. Yea, it’s shocking to see how much underwriting standards have deteriorated in this business.