Credit Risk Management

Credit Risk Management

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Security enhancement and

management

This section aims to explain the underlying assumptions and techniques

used in drafting loan covenants and illustrate how credit risk can be opti-

mized through the use of effective loan structuring by elaborating on:

■ the inter-relationship between loan structuring and repayment capac-

ity analysis;

■ the importance of working capital in loan structuring;

■ how loan covenants can be used effectively to achieve and maintain

proper structure;

■ the different underlying rationales and uses of covenants and security

structures;

■ testing the underlying security assumptions;

■ using projected balance sheets, and profit and loss statements to draft

loan covenants.

Security enhancement and management is a subject which encompasses

a broad range of financial, non-financial, and legal techniques which

will ultimately enable you to consider the results of a financial analysis

and use that information to make recommendations in the drafting of a

loan agreement structure. This loan agreement provides a structure to

the facility which is governed by loan agreement covenants, enabling the

banks to exercise control and protect their loan as well as the assets the

borrower has pledged to the bank as loan collateral.

This information is the fruit of the financial analysts’ work (analysing

historical and projected financial statements) and forms an indispensable

tool in enabling the bank (as well as borrower) to structure effective loan

agreements and maintain consistent asset quality throughout the bank’s

loan portfolio.

Follow-up on loan agreement

compliance

Following up on compliance with loan agreements is important but is

nevertheless neglected by some banks. This is extremely dangerous