Sample Financing Risk Criteria and Underwriting Guidelines for a Particular Business Sector

Sample Financing Risk Criteria and Underwriting Guidelines for a Particular Business Sector

1. Scope

1. Risk acceptance criteria:

1. Borrower/sponsor/guarantor profile

1. Corporate
2. Commercial / SMEs

1. General criteria: track record, technology of production, capable to procure raw materials sufficiently and manage inventory efficiently, long term relationship with suppliers for more than 1 year, wide distribution channels for products, appropriate environmental treatment systems, sale proportion to a buyer (e.g. not more than 30% of total sales: concentration risk), etc.
2. Financial criteria: sales volume, accumulated sales in the past, net profit, debt/equity ratio, current ratio, Debt Service Cover Ratio, days of inventory
3. Purpose of credit facilities

1. Purchase or acquisition of land, raw materials
2. Construction
3. General working capital
4. Issuance of guarantee in relation to tender, performance, supply, custom and security deposit in favour of government, semi-government and private companies

1. Types of facilities

1. Term Loan (investment in fixed assets, expansion of production capacity, machinery replacement, etc), Letter of Credit (purchase machineries and equipment), Hire Purchase, overdraft (clearing line), promissory note (support accounts receivable and inventory for local sales, maintain minimum inventory level including related expenses for normal operations), Packing credit and Bills purchase (Support accounts receivable and inventory for exported sales), Global F/X line (Hedge F/X for export sales), Letter of Guarantee (Electricity usage)

1. Tenure
2. Repayment terms

1. Bullet or balloon payment

1. Security arrangement

1. Charge over land or mill
2. Corporate guarantee / guarantee from major shareholders and/or key management, personal guarantee / letter of undertaking from sponsors
3. Debenture over the assets of the borrower
4. Mortgage of core assets or pledge or cash deposits

1. Conditions precedent to drawdown

1. Appointment of consultant and/or contractor acceptable to the bank.
2. Undertaking from shareholders/sponsors to bear any cost overrun as well as to ensure borrower is able to meet its debt repayment obligations under the facilities.
3. All relevant regulatory approvals shall have been obtained.
4. Confirmation by the factory/project consultant and/or contractor that the factory/project has been fully completed, commissioned and operational.
5. Submission of formal valuation report by a panel valuer of the bank, addressed to the bank, confirming that the estimated market value of the property with negative variance of not more than 5%.

1. Financial covenants

1. Minimum average Debt Service Cover Ratio of e.g. 1.3x ^[1]
2. Maximum Debt Equity ratio of e.g. 1.7x.

1. Other covenants

1. Subordination of shareholders’ advances during the tenor
2. Undertaking from the shareholders/sponsors to bear any project cost overrun as well as debt servicing to the bank.
3. Periodic progress report on stage of completion of the construction project.

1. Monitoring mechanism: Regular monitoring and tracking of credit utilization are essential to efficiently control the borrower’s credit line utilization. As such, the following monitoring shall be in put in place

1. Physical check: RM(s) are required to conduct regular site visit (at least once a year) to inspect borrower business activities.
2. Surprise site visit check: Required at least once a year.
3. Credit Bureau checking to be done at least once a year to be in line with the core credit policy. Result provides historical delinquency and monthly outstanding debts for the last 2-3 years which is helpful in verifying the dependability of the audited financial statements.

1. Background of the sector:

1. General characteristics
2. General condition
3. Productivity and capacity
4. Production costs, challenges and mitigants

1. Labour
2. Mechanization
3. Fertilisers

1. Construction costs and risk
2. Land suitability
3. Value chain
4. Impact of key governmental policies

1. Tax laws
2. Other mandates

1. Key risk assessment:

1. Industry/business risk

1. Essential demand/supply factors
2. Industry structure and characteristics
3. Barriers to entry/trade barriers
4. Pricing issues
5. Capital intensity; and
6. Regulatory framework

1. Price volatility

1. Price-takers vs. price-makers
2. Speculative activities
3. Threat of substitution
4. FX risk

1. Demand and supply risk

1. Income levels, population growth, changing consumer preference
2. Climate changes

1. Operational risk

1. The breadth and depth of operation has a direct impact on the competitiveness of the business (operations analysis)

1. Environmental and health issues
2. Mitigants

1. Assessment of key management personnel’s experience in the particular industry is important to ensure the sustainability of the business operation amidst various industry requirements
2. Hedging strategies to protect their company against price oscillation e.g. futures, exchange traded options, etc
3. Maintenance/upkeep
4. Maturity profile
5. Location/accessibility
6. Labour issues
7. Supporting infrastructure
8. Implementation of best practices
9. Extent of mechanization/automation
10. Level of R&D

1. Sources of repayment analysis:

1. Primary Source of Repayment (“PSOR”), Primary Source Break-Even (“PSBE”) and Secondary Source of Repayment (“SSOR”) assessment.
2. The financial projection which shall cover the tenor of the proposed loan shall also factor in projected capex (maintenance, upkeeping and replanting), and dividend payment in addition to other operating cash items.
3. Cashflow Projections and Sensitivity Analysis