Structuring Commercial Loans

Question 1

Four Keys to Loan Structure

Answer 1

1. Understand Banks Goals
2. Understand Client’s Goals
3. Identify Sources of Repayment
4. Choose Loan Elements that Respond to the first three keys.

Question 2

Bullet Revolver Loan

Answer 2

Is a credit revolves until stated maturity

Question 3

Four Loan Types

Answer 3

Seasonal Loans
Permanent Working Capital Loans
Bridge Loans
Term Loans

Question 4

Seasonal Loans

Answer 4

Finance the seasonal working capital needs of the borrower

Question 5

Permanent Working Capital

Answer 5

Finance the layer of working capital that never goes away, and should be regarded and the long-term capital structue

Question 6

Bridge Loan

Answer 6

Bridge a Gap until a specific event occurs the repays the loan.

Question 7

Permanent Working Capital Loans

Answer 7

Could use a term loan not exceeding five years with AR and Inv as collateral. Bank mu restrict use of proceeds, debt or interest coveage ratios and max Debt to equity

Question 8

Permanent Working Capital Loans second option

Answer 8

RLC with inventory and receivable as collateral. Usually 3 years. Borrowing base, with monthly quarterly, and every time they borrow. Suborkdinated Debt is also and option.

Question 9

Bridge Loans

Answer 9

Typically interest only with full repayment upon occurance of an event. Maturity is usually one year and secured by asset being financed.

Question 10

Term Loans

Answer 10

Regular payments of principal and interest until maturity, typically 3-10 years.

Question 11

Asset Based Loan

Answer 11

Use of a borrowing base along with a definition of eligible receivalbe and frequent monitoring of inventory is required along with an initial investigationby the banks examiners followed by periodic examinations

Question 12

What is a loan covenant

Answer 12

A legally enforceable promise or restriction in a loan agreement.

Question 13

Affirmative Covenants

Answer 13

Outline action the borrower is obligated to perform

Question 14

Negative Covenants

Answer 14

Is any covenant that defines action the borrower is not obligated to perform.

Question 15

Goal in drafting covenants

Answer 15

Ensure Full Disclosure
Protect Net Worth
Protect Cash Flow
Control Growth
Maintain Key Management
Assure Legitimacy

Question 16

Annual Statements

Answer 16

Regardless of whether audited or unaudited should be delivered within 120 days

Question 17

Interim Statement due

Answer 17

Up to 30 days after period in question

Question 18

Protection of Net Worth Covenants

Answer 18

Maintenance of TNW
Maximum Leverage Ratio
Key Person Insurance
Tax and Insurance Payments
Info on litigation
Restrictions on Dividend Payments, stock repurchase, high officer salaries loans shareholders
Additional Borrowings
Restrictions on Sale of Assets

Question 19

Protection of Cash Flow

Answer 19

Minimum interest coverage, FCC, Limitations on capital expenditures, or limitation of investments, restrictions on dividends, officer salaries.

Question 20

Protection of Asset Quality

Answer 20

Maintain property, plant and equipment, the right to inspect

Question 21

Control Growth

Answer 21

Maintenance of TNW covenant
Limit dollar amounts on RLC, and also use of borrowing base
Limits on capital expenditures, leverage

Question 22

Maintenance of Key Management

Answer 22

Maintaining Key Employment contracts and key person life insurance
Restrictions on mergers or change in business

Question 23

Assurance of Legitimacy

Answer 23

Preservation of the corporate entity use a covenant to maintain its status as a corporate entity
Key Person Life Insurance
Info on Contingent Liabilities

Question 24

Profitability for the Bank

Answer 24

Requiring borrowers to maintain bank services, checking accounts; default pricing agreements, step-up related to declines in performance