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Evaluating, Underwriting, and Making Commercial Loans
Session 1—Cash flow
- Good credit decisions depend on the logical evaluation of repayment sources
- Purpose—legal, ethical, within policy
- Repayment—cash flow, collateral, guarantees
- Structure—repay in full, on time, as agreed
- Repayment sources
- Sufficient cash flow
- Enough liquidation collateral value
- Satisfactory guarantees
- Cash flow repayment
- Global cash flow and global debt service coverage
- Why EBITDA doesn’t spell cash flow but what does
Session 2--Collateral
- Bankers like to tie together purpose and use of funds—borrower wants to acquire assets with loan proceeds and we take those assets as collateral
- Types of financing
- Seasonal working capital financing to acquire inventory and carry receivables is a common purpose
- Permanent working capital financing to fund both working capital assets and fixed assets needed to support sales growth
- Fixed assets financing, e.g., equipment, real estate
- Collateral Alternatives
- Assets in existence at the loan’s inception
- Current assets—cash, marketable securities, receivables, inventory
- Non-current assets—fixed assets, intangible assets
- Assets subsequent to the loan’s inception
- Rents, leases, and other pledged cash flows
- Evaluating Collateral Risk
- Liquidity and marketability
- Perishability
- Degree of control
- Loan-to-Value (LTV) and loss given default (LGD)
- Typical LTV ranges for collateralized assets
Session 3—Guarantees
- Why do bankers expect owners to guarantee
- Piercing corporate veil
- Psychological commitment
- Types of guarantees
- Full—unconditional, joint and several, unlimited as to amount and time
- Limited—conditional, individual, limited as to amount and time
- Evaluating guarantors
- What do guarantors have at the point of default?
- What wealth do guarantors have outside of their investment in borrowers?
- What is the realizable value of guarantors’ assets?
- Personal financial statement net worth adjusted for overvalued assets and understated liabilities
- What are guarantors’ personal income sources?
- Personal cash flow available for global cash flow after adjusting for personal expenses and debts Case study tying together cash flow, collateral, and guarantees
Overview of the webinar
The 3-part series will explain how a banker evaluates a borrower’s cash flow, collateral, and guarantees to determine a borrower’s ability to repay a loan. A case study links together the 3 parts.
Who should attend?
- Credit analysts
- Credit department managers
- Credit approvers
- Credit risk managers
- Commercial lenders
- Portfolio analysts
- Relationship managers
- Loan reviewers
Why should you attend?
Extending credit to a prospective borrower means figuring out if the borrower can repay the proposed loan. These three sessions explain why and how lenders evaluate repayment ability by analyzing cash flow, collateral, and guarantees. Is there enough cash flow from the borrower’s business to repay the loan in full, on time, and as agreed? If the borrower cannot repay, can the collateral take to secure the loan be liquidated and generate enough cash to repay the loan? If the borrower cannot repay, do the guarantors have sufficient resources to repay the loan?
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).