FIN 324

letter of credit

Standby letter of credit and trade letter of credit ....

Bridge Loan

Temporary Need of Funds Characteristics: Principal fully drawn down at outset and fully repaired at maturity, repaid through a liquidy event, generally more inherent risk so higher interest rate/fees

Types of loan ( now how to apply them in a scenario)

Term loan, multi draw, bridge loan, line of credit, revolver lines of credit, letters of credit

Inventories

raw materials, work in progress, and finished goods held by the firm for eventual sale

Tenor

Amount of time before loan must be fully paid

Prepaid expense

are payments made before products or service has been performed

What is the quick ratio

(Current Assets - Inventory) / Current Liabilities

What is the current ratio?

-Current assets/ current liabilities

Convenants

Agreement you get the loan terms and conditions of loans policy between the borrower and lender. Like you have to pay term down. FCCR loans and if they can repay back the loan under this amount of convenants maximum and minimum

CMTLD

A part of long term debt that is due within the next year

Liquidity

Ability of a company to generate cash

What are the components in current liabilities

Accounts payable, accruals, outstanding revolving credit facility, ending available revolver balance, current matures existing and new term loan

Inventory turnover

COGS/Average Inventory*365 ???

What are the components in a currents asset

Cash and cash equivalents, accounts receivable, inventory, prepaid expenses

Plan A, Plan B and Plan C (three ways out)

Cash flow, collateral, guarantee (explain them all) Cash: revenue source, net rearming, ending cost Collateral: intangible and liquidity which is your PPE, land taking your stuff (basically cash , finish goods, raw materials and PPE) Guarantees: is basically the third source of repayment. if a company can't pay to cash flow or collateral why will move on to guarntee so come to the company to tell them can you pay this out of pocket so in most scenarios they would ask startup

Character

Character of the management team (lenders look for quality in the borrower, their educational history, business background, stability, what's your management style) Management, expertise, reputation, competent, integrity

What is tangible net work and why do they want it?

Company is defaulting meaning the liquidity of the company

Loan agreement

Comprehensive agreement of what covenants they have, complex deals, source of repayment, tertiary source of repayment guarantees, collateral agreement ( long page of agreement)

5'cs or credit (6th)

Conditions, Character, Capacity, Capital, Collateral and Competetion

Borrower is planning to issue a corporate fixed income bond into the capital markets in 90 days. However it needs the money now?

Credit facility: bridge loan? Expected Source of repayment for facility:

Borrower is a retailer. Borrower needs to arrange seasonal inventory financing in anticipation of the Christmas season

Credit facility: lines of credit Expected source of repayment for facility: credit card

Accruals

Current maturities of long term debt

Accounts payable

DPO=(AP/COGS)*365

account receivable

DSO (A/R divided by rev) *365

maturity

Date by which all principal must be fully repaid

Networking capital

Difference between non cash current assets and non debt current liabilities ( cash has to be used to fund the growth in inventory and account receivable)

Cyclicality

Does a company revenue are they impacted by the overall economy ( if the economy is doing good the company is doing good too)

How do banks make money

Fees, loans and interest

Financial Covenants

Financial statements so calculate the ratio and check if it is compliance or not base off of what its say (minimum and maximum) debt: current maturities of long-term debt + current maturities

Revolving lines of credit

Find seasonal increase in net working capital Characteristics: Borrowing Base formula/ limitation, contractual vs non contractual, pay down fully for 30 days per year, borrow and repay as needed, interest only, principal at maturity

Term loan

Fund Capital Expenditures and Acquisition Characteristics: contractual periodic payments, borrow all principal upfront, once principal repaid cannot borrow again

Multi-Draw

Fund construction projects or multiple pieces of equipment over time Characteristics: Draw down faculty as needed, interest paid periodically on average principal outstanding, frequently converted into a term loan

Gross margin

Gross Profit/Sales

Income statement what is a gross margin what is it why is it there and what does it affect in the balance sheet

Gross margin is the demand of product, manufacturer efficiency of a company and customer value ( .....)

Negotiations

Guarntee, collateral, financial convenants, fees, interest rate and collateral

Industry considerations segments and sub segments of each industry company can lend differently

Health industry does better when lending to nursing homes than surgical facilities

Working capital

How do we plan and manage management is try to optimize working capital l

Capital

How much money are stakeholders putting in risk so how much skin is the game

Secondary source of repayment

If plan A (cash flow) does not work, plan B is collateral Securing the loan with something of value (assets, entire business) that bank has legal right to liquidate to pay loan back Typically the assets being financed by the loan is what is taken as collateral

Tertiary (third source of repayment)

If plan A and plan B do not work plan C is a guarantee Characteristics: making sure they pay out of pocket, recourse/non recourse, joint & several, unlimited/limited, release/springing

Process of reviewing and analyzing the historical statement to inform us about the future to see...

If they will be able to generate enough cash flow

Expertise and specialization

Important for them to pitch bet on the horse not on the jockey

The parameters of the income and balance sheet provide two to three sentence. ( first explain each and why they mean, what they tell us and why's it's there and what is the significance and impact in the analysis and why it affects the balance sheet

Income statement Gross margin: Operating margin: Balance sheet Net working capital: CMLTD:

What are the four different parts/ segments of a company life cycle? Which part/segment do banks typically not get involved with

Introduction, growth, maturity and decline. Banks typically don't get involved with startup companies because they are new and they have no cash flow or historical statements to look over to determine if they will be able to pay the loan. (Maturity is the sweet spot for the banks because you are able to look at all their financial statements and see if they will be able to generate enough cash flow)

Operating cycle

Is the length it took for a company investment

Facilities

Loan or Obligations

Promissory Notes

One page response (shorter) has key aspects such as the names of borrower and bank, amount of loan, interest rate, facility, the maturity date, tenor, amortization schedules and signatures

Counter-cyclicality

Opposite so if the economy is doing well the company's is doing bad and Vice versa ( examples: payday loan, check cash company people are more desperate for cash so they will do better at the company than suppose the economy so beer or real estate house price is booming the apartment market will go down because people can't afford it

Event of defaults

Payment default: Either gives the legal contractual right to bank to call the loan and force borrower to re-pay in full immediately In practice come to the table and talk it through Convenant default: Bank charges a fee to waive or renegotiate

Conditions

Qualitative factors of what's going on in the industry (lenders will be interested in what your plans are for using the money, there are variety options like the condition of the local or national economy, financial Heath of the borrower and any competition the business faces in the market place) Macro economics drives in the industry, is the industry okay to bank, life cycle of company, seasonality, cycnality, counter cyclianly, trajectory and margin expansions

Banking is all about relationship and risk what does that mean and why is that true

Relationship and risk is how banks make money. With more risk there's more rewards. Banks have to take risk and access them accordingly by looking at both qualitative and quantitive aspects to see if they are able to get the loan. For relationship it's a people business banks you have to have strong relationship to be able to generate profit and money which is how they make money which is by fees and giving out loan. But you have to have character, trust, loyalty, transparency which = integrity

Amortization

Repayment of principal

Liquidity Event

Repayment source of bridge loans that you need for a short period of time until you are able to generate enough cash

Primary source of repayment

Revolver/ Lines: cash conversion of NWC Term: Cash Flow from operation Multi-Draw: convert to a term loan Bridge: liquidity event

Total assets turnover

Sales/Total Assets

What does the term "sell the deal twice" refer too? Which parties are involved

Sell it to the client and the risk team so who approves the loan in the bank as an underwriter (recheck)

Several Guarantee vs Joint guarntee

Several guarantee: you are only accountable for what you said for your agreement that you will pay this amount of the share Joint agreement: is if one person doesn't pay it falls on everyone so let's say one doesn't it will go to the next one and so on and if no one pays it back then they take you to court since it's a collateral

Competition

There competitions between different banks of who can give the best terms for the loans. They need to keep in mind the other banks that they have competition with and see if the banks are being aggressive or conservative

What is maturity the sweet spot

They can see their historical statement and financial statements

Why do retailers do?

They do their revenue by the end of the year due to their Christmas holidays

Debt to Equity Ratio

Total Liabilities / Common Stock Equity

Seasonality

Ups and down of a company revenue within a calendar year ( examples: Christmas, farms, landscapes, nursery)

Event of Default

Violate a covenants, or don't make a principal interest payment

trajectory

What the overall industry is and the history and where's its going

WAAC

When cost of debt goes up cost of equity goes down because there is more risk

Collateral

Which refers to assets that are legally pledge to the lenders and that entities the lender access to cash flow that these pledge assets generate upon an event of default unless otherwise waived (plan B) They can also take pledge collaterals: PPE, inventory, A/R

Capacity

Which refers to the borrowers ability, capacity to generate sufficient cash flow to be able to meet its obligations and fixed charges. also referred to as plan A

Bridge Loan

You need money to buy a new factory and and you want to sell your old factory to get your capital required. You take out a bridge loan to cover the amount needed to get a new factory and once the factory is running you sell the old one and then you take the balance to repay the new loan

intangible assets

goodwill, patents, copyrights, trademarks

tangible assets

those assets that can be appraised by value or seen or touched