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Ratios and Covenants in Underwriting Commercial Loans
Introduction
- Repayment sources—cash flow, collateral, and guarantees
- Loan structure goals –to be repaid in full, on time, as agreed
- As agreed is managed by loan agreement’s conditions and covenants
Covenant Mechanics
- Qualitative or quantitative
- Positive or negative
- Dimensions—definition, time, measure
Balance Sheet and Income Statement Covenants
- Typical ratio covenants, e.g.
a. Liquidity, leverage
b. Interest coverage, debt service coverage
- Pros and cons of balance sheet vs. income statement ratios
Monitoring Compliance
- Borrower attestation of compliance
- Tickler systems
- Covenant default—monetary and non-monetary
- Waiver or enforcement pros and cons
Summary and Conclusion
Overview of the webinar
Conditions set out certain requirements that a borrower must meet at the inception of the loan, e.g., adequate insurances, taxes are current, fixed assets in good order, etc., but covenants govern what a borrower must do (positive covenants) and what a borrower may not do (negative covenants). Further, covenants may be qualitative or quantitative. For example, a positive qualitative covenant might be the requirement to provide quarterly financial statement no later than the 15th day after the quarter closing date, and a positive quantitative covenant might be that the borrower must meet a current ratio of at 2.0x. On the other hand, a negative qualitative covenant might be no additional borrowing without the bank’s prior consent or the debt/worth ratio must not exceed 2.5x.
Who should attend?
- Credit Analysts
- Credit Managers
- Loan review officers
- Work-out officers
- Commercial lenders
- Credit Risk Managers
- Chief Credit Officers
- Senior Lenders
- Senior Lending Officer
- Bank Director
- Chief Executive Officer
- President
- Board Chairman
Why should you attend?
Commercial bankers employ ratios in covenants to ensure that borrowers repay their loans as agreed. This session explains what and why ratios are commonly used in loan agreements and in what kind of financial covenants they work best.
Faculty - Mr.Dev Strischek
A frequent speaker, instructor, advisor and writer on credit risk and commercial banking topics and issues, Martin J. "Dev" Strischek is principal of Devon Risk Advisory Group based near Atlanta, Georgia. Dev advises, trains, and develops for financial organizations risk management solutions and recommendations on a range of issues and topics, e.g., credit risk management, credit culture, credit policy, credit and lending training, etc. Dev is also a member of the Financial Accounting Standards Board’s (FASB’s) Private Company Council (PCC). PCC’s purpose is to evaluate and recommend to FASB revisions to current and proposed generally accepted accounting principles (GAAP) that are more appropriate for privately held firms. He also serves as the PCC’s representative to FASB’s Credit Losses Transition Resource Group supporting the new current expected credit loss (CECL) standard. Dev is the former SVP and senior credit policy officer at SunTrust Bank, Atlanta. He was responsible for developing, implementing, and administering credit policies for SunTrust’s wholesale lines of business--commercial, commercial real estate, corporate investment banking, capital markets, business banking and private wealth management.