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Lending Skills > Structuring > Flashcards

Structuring Flashcards

1
Q

Use the figures in the cash flow statement below, including capital expenditure, to calculate
Payout EBITDA.

Cash flow statement 	        	£k
EBITDA 				               3,280
Corporation tax 		               (400)
Interest 			                       (275) 
Inflow/(Outflow) 		               2,605
Dividends 		                	(125)
Capital expenditure 	        	(360)
Capital repayments 		        (240)
Working capital adjustments 	 185
Surplus/(Shortfall) 		                 1,695
  • £545k
  • £1,215k
  • £1,585k
  • £2,060k
A

£1,215k

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2
Q

Based on the information in the table below, which of the following would fall within a realistic level to set a Gross Leverage covenant?
Year 1 Year 2
(£k) (£k)
Gross borrowings 25,100 24,000
Budget EBITDA 3,300 3,500
Payout EBITDA 2,500 2,600

  • 6.2x
  • 7.7x
  • 8.5x
  • 9.6x
A

8.5x

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3
Q

Using the figures below, calculate the CFADS:Debt Service Liability ratio.

Cash flow statement 		£k
EBITDA 				975
Corporation tax 		-55
Interest 			-200
Inflow/(Outflow) 		720
Dividends 			-35
Capital expenditure 		-40
Capital repayments 		-50
Working capital adjustments 	45
Surplus/(Shortfall) 		640
  • 2.56x
  • 2.76x
  • 3.23x
  • 3.56x
A

3.56x

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4
Q

Which of the following is a definition of Payout EBITDA?

  • The amount of profit required to meet all cash obligations
  • The amount of profit required to meet all debt obligations
  • The amount of profit required to meet dividend obligations
  • The amount of profit required to fund capital expenditure
A

The amount of profit required to meet all cash obligations

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5
Q

You have agreed to set both a Profit and Cash Flow covenant for a new facility. Which one of the following regarding test levels is correct?

  • Set the Profit covenant to breach before the Cash Flow covenant
  • Set the Cash Flow covenant to breach before the Profit covenant
  • Set the Profit and Cash Flow covenants to breach at the same time
  • It does not normally matter which of the two covenants is set to breach first
A

Set the Profit covenant to breach before the Cash Flow covenant

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6
Q

Which one of the following statements regarding covenants test levels is correct?

  • The test level must be set at the same level for the duration of the facility
  • Ratcheted covenants will never be appropriate for a business in a turnaround situation
  • Setting a ratcheted covenant may be particularly appropriate for a start-up business?
  • The test level should be set above the customer forecasts at the start to ensure close monitoring of the facility
A

Setting a ratcheted covenant may be particularly appropriate for a start-up business?

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7
Q

You have set a monitoring formula to help you manage risk on an overdraft facility. Which one of the following statements is correct?

  • If the facility regularly exceeds the terms of the monitoring formula, review with the customer and consider appetite for continuing the facility
  • Amend the facility limit on the account so that it reflects the level of asset cover afforded by the monitoring formula calculations
  • Where a facility is in excess of the agreed level of asset cover you can use the rights provided by the monitoring formula to demand repayment of the facility
  • Protect the Bank’s position by issuing a waiver letter whenever the overdraft exceeds the level of cover afforded by the monitoring formula
A

If the facility regularly exceeds the terms of the monitoring formula, review with the customer and consider appetite for continuing the facility

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8
Q

Which one of the following is normally the best measure of the ability of the business to service and repay debt?

  • EBITDA to Debt Service Liability
  • CFADS to Debt Service Liability
  • EBITDA to Interest Costs
  • Gross Borrowing to EBITDA
A

CFADS to Debt Service Liability

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9
Q

Which one of the following best describes when you should normally consider setting Financial Covenants to help mitigate risk?

  • All facilities including Overdrafts and Loans
  • Committed facilities in excess of £1M
  • On Demand Overdrafts in excess of £1M
  • All Loan facilities with a term in excess of 12 months
A

Committed facilities in excess of £1M

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10
Q 
EBITDA for a business in the last financial year was £1,300,000.  Payout EBITDA has been calculated at shown below:-
DEBT SERVICING COSTS		       £
Interest				                £150,000
Capital				                £250,000
Corporation Tax			        £350,000
Capital Expenditure		       £700,000
Dividends			               £100,000
Working Capital			      (£700,000)
PAYOUT EBITDA		                £850,000
Based solely on this information, which one of the following observations would be a major concern?
  • Payout EBITDA benefits from a large Working Capital adjustment that is not sustainable
  • Capital Expenditure is clearly too high for a business with EBITDA of £1.3M
  • Total Debt Servicing Costs are too high in relation to EBITDA
  • An increase in Dividend payments will seriously undermine repayment capacity
A

Payout EBITDA benefits from a large Working Capital adjustment that is not sustainable

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11
Q

Using the figures in the Cash Flow Statement below, calculate the CFADS to Debt Service Liability Ratio? (Calculate CFADS by deducting Capital Expenditure)
CASH FLOW STATEMENT £
EBITDA £2,500,000
Corporation Tax (£ 250,000)
Interest (£ 750,000)
INFLOW £1,500,000
Dividends (£ 400,000)
Capital Expenditure (£ 100,000)
Capital Repayment/Lending (£ 200,000)
Working Capital Adjustments (£ 120,000)
SURPLUS £ 680,000

  • 0.72
  • 1.72
  • 1.97
  • 2.17
A

1.72

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12
Q

You have decided to set an EBITDA to Debt Service Liability covenant.
Customer Budget and Payout EBITDA projections are as follows:-
Year 1 Year 2
Budget EBITDA £2,800,000 £3,000,000
Payout EBITDA £2,000,000 £1,900,000

In which one of the following ranges for EBITDA would you normally expect to set the covenant test level?

  • Below £1,900,000
  • Between £2,300,000 and £2,600,000
  • Between £2,800,000 and £3,300,000
  • Above £3,500,000
A

Between £2,300,000 and £2,600,000

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13
Q

Based on the Budget prepared by your customer, you have calculated the CFADS to Debt Service Liability ratio for the next 4 years below.
CFADS to Debt Service Liability Ratio
Year 1 1.4
Year 2 1.3
Year 3 1.0
Year 4 1.1
Based solely on these figures, what would be your initial observations?

  • Over the four year period, Cash Flow is good but will struggle to cover commitments in Years 1 & 2. The business will need to restructure if we are to consider lending
  • Cash Flow is at acceptable levels in Year 3 and Year 4 but well below our requirements in Year 1 and Year 2. We would not consider providing facilities due to inability to service debt at the outset
  • Cash Flow is positive in Year 1, reduces in Year 2 and is barely adequate in Year 3 and Year 4. This trend will need to be understood if we are to consider lending
  • Surplus cash generated in Year 1 and Year 2 should be used to reduce debt so that servicing is not a problem in subsequent years. On this basis we would be prepared to lend
A

Cash Flow is positive in Year 1, reduces in Year 2 and is barely adequate in Year 3 and Year 4. This trend will need to be understood if we are to consider lending

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14
Q

Your customer has breached a covenant test level. Which one of the following statements is correct?

  • Always issue a reservation of rights letter to protect the Bank’s position
  • If you intend to renegotiate the loan terms and conditions you must first issue a formal demand letter
  • A waiver letter must be issued on every occasion a customer is in breach before other action is considered
  • Ignoring a covenant breach even if the position is quickly adjusted is likely to weaken the Bank’s position in respect of any subsequent breaches
A

Ignoring a covenant breach even if the position is quickly adjusted is likely to weaken the Bank’s position in respect of any subsequent breaches

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15
Q

What would be your initial observations on these budget figures and our calculation of Payout EBITDA for a new lending proposition?
Year 1 Year 2
Budget EBITDA £2,700,000 £2,800,000
Payout EBITDA £2,500,000 £2,550,000

  • The figures are encouraging as there is a close correlation between Budget and Payout EBITDA indicating a robust forecasting process
  • Customer will need to redraw Budgets to ensure a greater margin between Budget and Payout EBITDA if we are to consider lending
  • There is real concern because with Payout EBITDA so close to the customer’s Budget there is little room for a deterioration in business performance
  • We would only look at providing facilities where Payout EBITDA is in excess of the customer Budget EBITDA
A

There is real concern because with Payout EBITDA so close to the customer’s Budget there is little room for a deterioration in business performance

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16
Q

What is the principle benefit from calculating Payout EBITDA?
It confirms how much profit the business must generate to meet

  • All cash obligations of the business
  • All cash obligations of the business excluding debt service costs
  • All cash obligations of the business prior to paying tax commitments
  • All cash obligations of the business excluding capital repayments on debt
A

All cash obligations of the business

17
Q 
Using the figures in the Cash Flow Statement (including capital expenditure) below, calculate the Payout EBITDA figure.
Cash Flow Statement		             £
EBITDA				              £1,250K
Corporation Tax			      (£    35K)
Interest				             (£  450K)
Inflow (Outflow)		              £   765K
Dividends			             (£    30K)		
Capital Expenditure		     (£    70K)
Capital Repayments/Lending    (£  100K)
Working Capital Adjustments     £    50K
Surplus(Shortfall)		              £    615K
  • £500K
  • £600K
  • £635K
  • £735K
A

£635K

18
Q

What is meant by debt headroom?

  • Difference between short and long term debt levels
  • Total Balance Sheet debt less the working capital requirement
  • Total debt that the business can service and repay from existing profits
  • Gap between existing debt levels and the quantum of debt the business is able to service
A

Gap between existing debt levels and the quantum of debt the business is able to service

19
Q

Which one of the following is the best indicator of how much debt a business is carrying & if that debt is within acceptable limits?

  • EBITDS to Debt Service Liability
  • CFADS to Debt Service Liability
  • EBITDA to Interest Costs
  • Gross Borrowing to EBITDA
A

Gross Borrowing to EBITDA

Lending Skills (7 decks)

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