Credit Risk Management

Credit Risk Management

by Andrew Fight
Released November 2004
Publisher(s): Butterworth-Heinemann
ISBN: 9780080472409

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Book description

Credit Risk Management will enable general bankers, staff, and credit analyst trainees to understand the basic information and principles underlying credit risk evaluation, and to use those underlying principles to undertake an analysis of non financial and financial risks when preparing a credit proposal. Since the best loans are the ones that do not present problems during the repayment phase, the authors also focus on elements relating to the proactive management of those loans during their inception.


This book introduces:
*Credit analysis, approval and management processes
*Concepts of financial and non-financial risk
*Financial statement analysis, including the use of ratio anaylsis
*Cash flow analysis and forecasting
*Security enhancement & management procedures designed to legally & financially manage credit risk

*Inspired by the basic entry level training courses that have been developed by major international banks worldwide.
*Will enable students and those already in the finance profession to gain an understanding of the basic information and principles of credit risk
*Questions with answers, study topics, practical "real world" examples and text with an extensive bibliography

Table of contents

  1. Cover
  2. Credit Risk Management
  3. Contents
  4. Foreword
  5. 1 Introduction to credit risk management
    1. What is the role of credit analysis?
    2. Framework for credit analysis
    3. Types of lending
      1. Temporary or seasonal finance
      2. Working investment finance
      3. Cash-flow lending
    4. Types of financial statements
      1. The company annual report
      2. Other types of financial statements
    5. Contents of financial statements
      1. The balance sheet
      2. The P/L statement
        1. Diagram of balance sheet and P/L statement
      3. Statement of sources and applications of funds
      4. Other elements of the annual report
        1. Notes to the financial statements
        2. Auditors’ remarks
        3. Directors’ information
    6. Different presentations of financial statements (1/2)
    7. Different presentations of financial statements (2/2)
    8. Problems with financial statements and auditors
    9. Analytical methodology
      1. Spreading the statements
        1. Sample blank spreadsheet
      2. Analysing the spreadsheets
      3. Using comparative financial ratios
      4. Peer group analysis
    10. Outside information
      1. Information available direct from the borrower
      2. Bank and trade enquiries
      3. Business registry databases
      4. Bureau van Dijk AMADEUS electronic database
        1. Complete AMADEUS spreadsheet (Vodafone)
      5. Credit reporting and rating agencies
      6. Industry information
      7. Reference materials
      8. Periodicals
    11. Exercises
      1. Questions
      2. Answers
  6. 2 Business risks
    1. Introduction to business risks
      1. Borrower risk
      2. Transaction risk
      3. The ‘new economy’
    2. Introduction to non-financial and transactional risks
      1. Borrower risk (1/2)
      2. Borrower risk (2/2)
        1. Financial risk
        2. Business risk
          1. PEST analysis
          2. SWOT analysis
          3. Porter’s risk assessment matrix
          4. Porter’s five competitive forces
      3. Transaction risk
    3. Some questioning techniques
      1. Who, What, Where, When, Why, and How
    4. Nature of the obligor
      1. Example A – Memorandum and Articles of Association
      2. Example B – corporate registration fees
      3. Obligors with unlimited liability
    5. Management
    6. Macro-economic risk areas
      1. Understanding the industry
      2. Understanding the markets
      3. Understanding the products
      4. Understanding manufacturing/performance risk
    7. Micro-economic risk areas
      1. Growth
      2. Corporate strategy and plans
      3. Business plan
      4. Management
      5. People
      6. Land and buildings
      7. Plant and machinery
      8. Infrastructure
    8. Exercises
      1. Questions
      2. Answers
  7. 3 Financial risks
    1. Financial statement analysis
      1. Introduction to financial statement analysis
      2. The annual report and accounts
        1. About published accounts
        2. Introduction
        3. The Companies Acts
        4. Filing information with the Registrar of Companies
        5. The statement of accounting policies
        6. Accounting premises
        7. Accounting bases
        8. Accounting policies
        9. Points of interaction between the balance sheet and P/L
        10. Consequences of abnormal accounting policies
        11. The auditor’s report
          1. Auditor’s rights
          2. Auditor’s duties
          3. Auditing Practices Board
          4. Summary
          5. Auditor’s opinion
          6. Other opinions
        12. The directors’ report
        13. Stock Exchange requirements
        14. Example of a directors’ report
      3. The balance sheet (1/4)
      4. The balance sheet (2/4)
      5. The balance sheet (3/4)
      6. The balance sheet (4/4)
        1. Introduction
        2. Simple balance sheet
        3. Annual report balance sheet
          1. Explanation of balance sheet illustration
        4. Debtors
          1. Companies have different debtor profiles
          2. Trade debtors/turnover
        5. Creditors
          1. Various types of creditors
          2. Amounts owed to group companies
        6. Stock and work in progress
          1. Stock (Inventories)
          2. Valuing stock
          3. Inventory valuation methods
          4. SSAP and stocks
          5. Net realizable value of work in progress and finished goods
        7. Borrowings
          1. Limitations on borrowings
          2. Banking facilities
        8. Fixed assets
          1. Investments
          2. Depreciation
          3. Depreciation methods
        9. Share capital
          1. Authorized and issued share capital
          2. Preference shares
          3. Ordinary shares
          4. Deferred shares
          5. Warrants
        10. Share details
        11. Reduction of share capital
        12. Reserves
          1. Types of reserves
      7. The P/L account
        1. Annual report P/L
      8. Cash flow statements
        1. Annual report cash flow statement
      9. Simple ratio analysis
        1. Liquidity measurement ratios
          1. The current ratio
          2. The quick ratio
        2. Asset management ratios
          1. Debtors to sales
          2. Stock turnover
        3. Capital structure ratios
          1. Gearing ratios
          2. Capital structure
          3. Interest cover
          4. Dividend cover
        4. Profitability measurement ratios
          1. Profit margin
          2. Return on capital employed
      10. Limitations of published accounts
      11. Exercises (1/2)
      12. Exercises (2/2)
        1. Questions
        2. Answers
    2. Ratio analysis
      1. What is ratio analysis?
        1. The users
        2. Internal and external information
      2. Classifying ratios (1/3)
      3. Classifying ratios (2/3)
      4. Classifying ratios (3/3)
        1. Performance ratios
          1. ROCE (Return on Capital Employed)
          2. ROE (Return on Equity)
          3. Profit performance measurements
          4. Asset performance measurements
          5. Case study
        2. Financial standing ratios
          1. Longer-term solvency measurement
        3. Investment ratios
          1. Gross or net dividend yield
          2. Dividend cover
      5. Historical and peer group analysis (1/2)
      6. Historical and peer group analysis (2/2)
      7. Composite industry ratios
      8. Limitations of ratio analysis
      9. Exercises (1/2)
      10. Exercises (2/2)
        1. Questions
        2. Answers
    3. Cash flow forecasting
      1. Introduction
      2. Financial statement forecasting framework
      3. The nature of term lending
      4. Financial projections
        1. Sources and uses of cash
        2. Uses of cash flow forecasts
  8. 4 Transaction risks
    1. Term loan agreements
      1. Purpose of loan agreements
    2. Covenants, events of default, and protection
      1. Primary covenants
      2. Secondary covenants
      3. Events of default
      4. Conclusion
      5. Appendix A ratio calculations
    3. Security enhancement and management
    4. Follow-up on loan agreement compliance
    5. Background to loan agreement covenants
      1. Covenants and undertakings
      2. Primary non-financial covenants
        1. Negative pledge
        2. Cross-default pledge
        3. The Pari Passu covenant
        4. Material adverse change clause
        5. Anti-merger
        6. Anti-disposal
      3. Financial covenants
        1. Net worth test
        2. Restrictions on secured borrowing
        3. Interest cover test
        4. Dividend restraints
        5. Minimum net worth requirement
      4. Breach of covenant
      5. Further considerations relating to covenants
      6. Default
        1. Events of default
        2. Various levels of default
        3. Common events of default
  9. 5 Failure and risk classification systems
    1. Identifying causes of failure
      1. Cyclical decline in demand
      2. Poor top management
      3. Effective management information systems and financial controls
      4. Effective M&A and integration
      5. Poor product development and marketing
    2. Failure prediction models
      1. Financial failure prediction models
      2. Non-financial failure prediction models
      3. Problems with failure prediction models
  10. 6 Annexes
    1. Management attitude problem exhibit No.1
    2. Creative accounting exhibit No.1
    3. FRS and SSAP accounting reporting standards
  11. Glossary
    1. A
    2. B
    3. C
    4. D
    5. E
    6. F
    7. G
    8. I
    9. L
    10. M
    11. P
    12. R
    13. S
    14. T
    15. U
    16. W
    17. Y
  12. Suggested readings
    1. Ideas for further reading
  13. Index
    1. A
    2. B
    3. C
    4. D
    5. E
    6. F
    7. G
    8. H
    9. I
    10. L
    11. M
    12. N
    13. P
    14. Q
    15. R
    16. S
    17. T
    18. V
    19. W

Product information

  • Title: Credit Risk Management
  • Author(s): Andrew Fight
  • Release date: November 2004
  • Publisher(s): Butterworth-Heinemann
  • ISBN: 9780080472409