Credit risk management

[...]... the past few years In this book on credit risk management, we will be looking specifically at the appropriate methods of analysis for lending to companies, a subject more often known as ‘corporate credit What is the role of credit analysis? Credit analysis supports the work of marketing officers by evaluating companies before lending money to them 2 Credit Risk Management This is essential so that... company is operating? Introduction to credit risk management Framework for credit analysis Credit analysis includes financial and non-financial factors, and these factors are all interrelated These factors include: I I I I I I the environment, the industry, competitive position, financial risks, management risks, loan structure and documentation issues Overview of credit analysis process Identify purpose... and ensure that it has resources to withstand them 3 4 Credit Risk Management We shall consider each of these factors in detail, starting with macroeconomic factors which affect the economy and sectors of the industry and then focus on company risk and the risks that might affect particular loans Types of lending The starting point in analysing the creditworthiness of a company is to consider the type... Chapter 1 Introduction to credit risk management Lending has always been the primary function of banking, and accurately assessing a borrower’s creditworthiness has always been the only method of lending successfully The method of analysis required varies from borrower to borrower It also varies in function of the type of lending being considered For example, the banking risks in financing the building... by the company’s operations, and by the profits retained in the business over time Inability of the company or management to generate a sufficient level of profits to cover operating costs and debtservicing costs Management to generate pr Adequate equity cushion Unused debt ca 6 Credit Risk Management Asset conversion cycle Cash Collect payment Order raw materials Sell goods Work in progress Finished... long form details computations and verification tests made in connection with all material assets and liabilities The long form is usually prepared for management purposes while the short form usually goes to creditors Introduction to credit risk management The audit also expresses an opinion which may be unqualified or qualified: I I An unqualified opinion states that the auditors have examined the... loans Proposed dividend Other creditors Net current assets Total assets less current liabilities Creditors: amounts falling due after more than 1 year Provisions for liabilities and charges Deferred income: government grants Capital and reserves Called up share capital Share premium account Capital redemption reserve P/L account Minority interests Introduction to credit risk management Cash-flow statement... the other creditors For this reason, subordinated debt is usually broken out and listed between the total figure of longterm debt, and equity, which has the lowest claim on the company’s assets (which means that it is paid last in a liquidation before the shareholders) Some analysts add subordinated debt to net worth, thereby treating it as a quasi-equity item Introduction to credit risk management. .. there are different risks involved in different types of lending Establishing what type of lending is being proposed will define the approach to be adopted in assessing the creditworthiness of a company The three primary types of lending and their risks are as follows: I I I Temporary or seasonal finance Working investment lending Cash-flow lending One US bank summarized these risks as given in the... ordinary share 19 20 Credit Risk Management Balance sheet at 31 December 200x Note Group Company Restated 200x 200x 200x Fixed assets Restated 200x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Tangible assets Investments Subsidiary undertakings Associated undertakings Current assets Freehold property held for sale Stocks Debtors Cash at bank and in hand Creditors: amounts . position, ■ financial risks, ■ management risks, ■ loan structure and documentation issues. Introduction to credit risk management 3 Overview of credit analysis process Key risks and mitigation Industry evaluation Environment evaluation Security evaluation Historical. can be of use in effective credit risk management. Andrew Fight www.andrewfight.com Foreword ix This page intentionally left blank Chapter 1 Introduction to credit risk management Lending has always.