Credit Risk Management

Cover......Page 1
Credit Risk Management......Page 4
Contents......Page 6
Foreword......Page 8
What is the role of credit analysis?......Page 12
Framework for credit analysis......Page 14
Temporary or seasonal finance......Page 15
Working investment finance......Page 17
Cash-flow lending......Page 18
The company annual report......Page 19
Other types of financial statements......Page 20
The balance sheet......Page 21
Diagram of balance sheet and P/L statement......Page 24
Statement of sources and applications of funds......Page 25
Notes to the financial statements......Page 26
Auditors’ remarks......Page 27
Different presentations of financial statements......Page 29
Problems with financial statements and auditors......Page 39
Spreading the statements......Page 43
Sample blank spreadsheet......Page 44
Analysing the spreadsheets......Page 47
Using comparative financial ratios......Page 48
Outside information......Page 50
Information available direct from the borrower......Page 51
Bureau van Dijk AMADEUS electronic database......Page 54
Complete AMADEUS spreadsheet (Vodafone)......Page 57
Reference materials......Page 71
Periodicals......Page 72
Questions......Page 73
Answers......Page 77
Introduction to business risks......Page 78
Borrower risk......Page 79
The ‘new economy’......Page 80
Introduction to non-financial and transactional risks......Page 81
Financial risk......Page 83
PEST analysis......Page 84
SWOT analysis......Page 86
Porter’s risk assessment matrix......Page 88
Transaction risk......Page 89
Who, What, Where, When, Why, and How......Page 90
Nature of the obligor......Page 93
Example A – Memorandum and Articles of Association......Page 94
Example B – corporate registration fees......Page 95
Management......Page 96
Understanding the industry......Page 98
Understanding the products......Page 100
Understanding manufacturing/performance risk......Page 102
Corporate strategy and plans......Page 103
Management......Page 104
Land and buildings......Page 105
Plant and machinery......Page 106
Infrastructure......Page 107
Questions......Page 108
Answers......Page 112
Financial statement analysis......Page 114
About published accounts......Page 115
Introduction......Page 116
Filing information with the Registrar of Companies......Page 117
The statement of accounting policies......Page 118
Accounting policies......Page 119
Points of interaction between the balance sheet and P/L......Page 120
Auditor’s duties......Page 121
Auditor’s opinion......Page 122
The directors’ report......Page 123
Stock Exchange requirements......Page 124
Example of a directors’ report......Page 125
Introduction......Page 127
Simple balance sheet......Page 128
Annual report balance sheet......Page 129
Explanation of balance sheet illustration......Page 130
Companies have different debtor profiles......Page 131
Creditors......Page 132
Amounts owed to group companies......Page 133
Valuing stock......Page 134
SSAP and stocks......Page 135
Borrowings......Page 136
Banking facilities......Page 137
Investments......Page 138
Depreciation methods......Page 139
Preference shares......Page 140
Warrants......Page 141
Reserves......Page 142
The P/L account......Page 143
Annual report P/L......Page 145
Cash flow statements......Page 148
Annual report cash flow statement......Page 149
Simple ratio analysis......Page 152
The quick ratio......Page 153
Gearing ratios......Page 154
Return on capital employed......Page 155
Limitations of published accounts......Page 156
Questions......Page 157
Answers......Page 165
Ratio analysis......Page 166
The users......Page 168
Internal and external information......Page 169
Classifying ratios......Page 170
Performance ratios......Page 171
ROCE (Return on Capital Employed)......Page 173
Profit performance measurements......Page 174
Asset performance measurements......Page 176
Case study......Page 177
Financial standing ratios......Page 179
Longer-term solvency measurement......Page 181
Investment ratios......Page 183
Dividend cover......Page 184
Historical and peer group analysis......Page 185
Composite industry ratios......Page 191
Limitations of ratio analysis......Page 192
Questions......Page 197
Answers......Page 201
Introduction......Page 205
The nature of term lending......Page 206
Financial projections......Page 207
Uses of cash flow forecasts......Page 208
Purpose of loan agreements......Page 210
Covenants, events of default, and protection......Page 211
Secondary covenants......Page 212
Conclusion......Page 213
Appendix A ratio calculations......Page 214
Follow-up on loan agreement compliance......Page 215
Background to loan agreement covenants......Page 216
Covenants and undertakings......Page 217
The Pari Passu covenant......Page 218
Net worth test......Page 219
Minimum net worth requirement......Page 220
Breach of covenant......Page 221
Further considerations relating to covenants......Page 222
Various levels of default......Page 223
Common events of default......Page 224
Identifying causes of failure......Page 225
Cyclical decline in demand......Page 226
Poor top management......Page 227
Effective management information systems and financial controls......Page 229
Effective M&A and integration......Page 231
Poor product development and marketing......Page 232
Failure prediction models......Page 236
Financial failure prediction models......Page 237
Non-financial failure prediction models......Page 239
Problems with failure prediction models......Page 242
6 Annexes......Page 243
Management attitude problem exhibit No.1......Page 244
Creative accounting exhibit No.1......Page 245
FRS and SSAP accounting reporting standards......Page 246
B......Page 248
C......Page 249
E......Page 250
G......Page 251
M......Page 252
S......Page 253
Y......Page 254
Ideas for further reading......Page 255
A......Page 256
B......Page 257
C......Page 258
D......Page 259
F......Page 260
L......Page 261
N......Page 262
R......Page 263
T......Page 264
W......Page 265