Ratios and Covenants in Underwriting Commercial Loans

Duration 60 Mins
Level Basic & Intermediate
Webinar ID IQW19L1232

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. He also spent three years as managing director and credit approver in SunTrust’s Florida commercial lending and corporate investment banking areas, respectively. Prior to SunTrust, Mr. Strischek was chief credit officer for Barnett Bank’s Palm Beach market. Besides stints at other banks in Florida, Kansas City, and Ohio, his experiences outside of banking include CFO of a Honolulu construction company, combat engineer officer in the U.S. Army, and college economics instructor in Hawaii, Missouri, and Florida. A graduate of Ohio State University and the ABA Stonier Graduate School of Banking, he earned his M.B.A. from the University of Hawaii. Mr. Strischek serves as an instructor in RMA’s Florida Commercial Lending School, the American Bankers Association's (ABA) Advanced Commercial Lending School and ABA’s  Stonier Graduate School of Banking, and the Southwest Graduate School of Banking. His school, conference, and workshop audiences have included participants drawn from the ABA, RMA, OCC, Federal Reserve, FDIC, FFIEC, SBA, the Institute of Management Accountants (IMA) and the AICPA. Recent conference presentations have ranged from the new GAAP accounting principles for revenue recognition, lease capitalization, and current expected credit losses (CECL) to commercial real estate concentration management, from character in lending to leveraged lending, from credit risk management techniques and tools to why EBITDA doesn’t spell cash flow. Mr. Strischek has written over 200 articles about credit risk management, financial analysis and related subjects for the ABA’s Commercial Insights, the Risk Management Association’s RMA Journal, and other business professional journals. He is the author of Analyzing Construction Contractors and its related RMA workshop. A past national chair of RMA and former RMA Florida Chapter president, Dev serves as a member of the RMA Journal’s advisory board, and an ex-officio board member of the Florida and Atlanta RMA chapters. He also serves on the advisory board of the Atlanta Chapter of the Professional Risk Managers’ International Association (PRMIA), and he has consulted on credit risk and policy issues with banks in Morocco, Egypt, and Angola through the US State Department’s Financial Service Volunteer Corps (FSVC).

 

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