Credit Risk Management

shareholders’ funds. The higher the number, the greater the risk. A com-

pany that has a large proportion of its permanent capital from debt is

referred to as being highly geared.

Guarantees Usually an undertaking by a third party to assume the

debts of the borrower in the event of default. A common situation with

parent/affiliate lending arrangements. Guarantees can and do expire,

and the analyst should ensure in the credit review that they are either

still valid, or have been renewed.

Intangible assets Items which are valuable to a company but have no

material form. These are trademarks, reputation, brand loyalty and

copyrights, for example.

Investor/Creditor community Entities which provide funds to companies.

Investors buy shares in the company (equity), while creditors lend money

to companies (debt).

Lawsuits Items which do not appear on the balance sheet but can have a

financial impact on the company. Also considered as ‘contingent liabil-

ities’, these should be explained in the notes to the financial statements.

Lending risk The risks the bank is getting into by putting the loan into

place. Often more narrowly defined as risk arising from inadequate or

faulty loan documentation.

Leverage (1) This is the American term for gearing. (2) In the UK this is the

same as gearing, with the addition of non-interest bearing external debt.

Liquidation Selling off the company’s assets to satisfy creditors during

a winding up. The main risk in a liquidation is asset shrinkage:

whether the assets being liquidated can fetch a market value suffi-

cient to satisfy all the creditors.

Loan agreement Every loan should have one. These define the rules

and obligations binding on the lenders, borrowers guarantors and

related parties.

Loan officers The persons who look after client relations and new busi-

ness opportunities. The analyst’s work is to evaluate objectively the

companies and businesses loan officers are proposing to lend to, and

submit their evaluations in the credit review process.

Loans, short-term Loans under one-year duration.

Loans, term Loans of between 2 and 7 years’ duration.

Market capitalization This is the aggregate market value of all out-

standing shares of a corporation.

Glossary

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