Managing Credit Risk

Know your Customer

? Must have pertinent, accurate and timely information

? Must understand management’s Character, no amount of cash flow tops Character in rough times.

? Establish Good working relationships

? Listen for non-verbal and verbal clues when speaking

? Establish credibility as a knowledgeable and friendly professional

? Gain insight about your client’s operations, suppliers, facilities, history and ownership

? Investigate competition, market share, and the impact of economic changes on their business

? Learn and make judgement on their business strategy and what they must do to succeed

Analyze Non-Financial Risks

? Understand your client’s business by analyzing non-financial risks positioning yourself as a valuable member of their advisor team

? Know the economic and industry factors influencing you client’s financial stability

? Determine the risks by industry, business and management

? Are these risk systematic across an industry, economy or only effect your client

? Here you must evaluate the macroeconomic items, critical thinking is required to determine the overall credit risk these factors drive and this enables you to do a more complete risk analysis

? Your role sis not to eliminate risk, but be able to articulate it and minimize its effect on your firm

Understand the Numbers

? How is the credit you are granting going to be used

? Determine the risks associate with this use of finds and the ability of the client to pay it back

? Why are they borrowing – is it a new client or existing client – they should be probed differently and your knowledge is critical

? Does the reason and the company history, strategies align with the rationale, does it make sense from your view, if not probe more.

? Once you understand the rationale, use the numbers and analytics to move forward with an informed decision.

? Balance Sheet, Income Statement and Cash Flow adjusted for seasonality enable you to determine the likelihood the capital will be deployed smartly and your change of repayment is enhanced.

? You use these points to forecast the future financial statements and ability for your client to remain strong and implement their strategy

Structure the Deal

? Identify the characteristics influencing your client’s success

? What does the business do, how is the industry effected by macro forces, what are the anticipated economic conditions, Client’s Business Strategy, Management Competencies

? We must review the client’s profitability, cash flow, liquidity and leverage to structure a deal that works for them and ourselves

? You must structure the deal with specific boundaries the client understands, you must consider the short and long-term implication for your relationship with the client.

? Both parties need assurance that is the client performs in accordance wt the terms and condition they can expect funds flow

Price the Deal

? You need to make an adequate return on your funding

? Internally you can manage client funding rates through futures and options trading and this ability should be considered when determining the timing, length and risk of your client

? Tying the loan with floating rates spreads the risk between you and your client, does this work for your relationship

? What are the company specific issues, your market position, the clients; general economic trends, matching pricing to internal assets and liabilities for maturity relationships

? You should price the deal with all these complexities to adequately compensate for your risk

Present the Deal

? Communicate everything in a coherent and professional manner

? Make sure the client is aware Credit Decisions are not make on financial statements alone

? You should highlight the qualitative, competitive and overall business environmental factors used in your decision criteria

? Summaries, environments, management financials and source of repayment are wrapped into a Credit Decision that drive the deal presentation

Close the Deal

? Prepare the deal paperwork

? Present the deal and provide sufficient time for the client and other parties involved to gather their documents and respond

? Provide detailed instructions on how to close the deal paperwork, gather material and meet the client’s timelines

? Gather the appropriate legal documents and funding items for delivery

Monitor the Relationship

? Two ways – include checklists for routine tracking of the client’s adherence to covenants and Require the Relationship Manager and loan team to meet regularly with the client and certify their compliance

? Periodic reviews, ratings and audits can ensure a long-term mutually beneficial relationship for you and the client