CCP Intermediate Level

Corporate Credit Analysis flashcards

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What are the four outcomes a credit decision can end in?

Approve as proposed. Approve with modified terms (tighter covenants, more security, a lower amount). Decline. Refer upward for a larger exposure.

Why can an individually strong proposal from a group company still be declined?

Group lending meets CBK's single-obligor and connected-party exposure limits. If the new facility would push the lender's aggregate exposure to the whole group over its limit, it must be declined or restructured, however strong it looks alone. It is a portfolio-level constraint layered on top of the borrower-level credit assessment.

How should a lender respond to a business model that depends on one customer?

Structure the facility around that customer relationship, for example by taking an assignment of receivables from the named customer, rather than simply declining. The lender then has direct recourse to the concentrated revenue stream itself.

What trade-off does a lender weigh when deciding how tight to set covenants?

Tighter covenants reduce the lender's risk and give an earlier warning and intervention point. But they raise the chance of a technical breach forcing an early, possibly unnecessary, confrontation with an otherwise-performing borrower.

Why can weak governance weigh toward decline even when the ratios are strong?

Weak governance, such as a dominant owner-manager with no independent board, undermines confidence in every other input to the decision, including the financial statements the ratios come from. Strong ratios from figures that cannot be fully trusted are not the same reassurance as strong ratios from a well-governed corporate.

A borrower's DSCR is 1.1x. Does that mean approve or decline?

Neither automatically. It still technically covers debt service, so it is a decision to structure more conservatively: a lower amount, tighter covenants or additional security. By contrast, a DSCR of 1.5x might support a straightforward approval.

Besides the borrower's general credit standing, what should the price of a debt instrument reflect?

The instrument's actual seniority and security position. Pricing a subordinated tranche as if it carried senior-secured risk understates the lender's true exposure.

How should the terms change for a borrower in a declining-stage industry?

Lending is not automatically wrong, but the decision should reflect the stage: shorter tenors, higher security coverage, closer monitoring triggers than the same borrower would warrant in a growth-stage sector.

What is the difference between a naturally hedged and an open foreign-currency exposure, for lending purposes?

Naturally hedged: for example an exporter earning USD. Open: for example a KES-revenue importer. The lending decision should state explicitly which applies and structure covenants or hedging conditions to match, rather than leave it as background commentary.

Why act on early symptoms of financial distress rather than waiting for missed payments?

Missed payments are a late-stage signal. A lender that waits for them before intervening has already lost much of the value early intervention could have preserved.

Why can two lenders reach opposite decisions on an identical loan application?