Leveraged Lending

Credit Analysis

Effective management of leveraged financing risk is highly dependent on the quality of analysis during the approval process and after the loan is funded. At a minimum, analysis of leveraged financing transactions should ensure that:

Cash flow analysis adequately supports a borrower’s ability to repay debt based on actual and projected cash flows, and is well documented and supported.

Analysis does not rely on overly optimistic or unsubstantiated projections of sales, margins, and merger and acquisition synergies.

Projections provide an adequate margin for unanticipated merger-related integration costs.

Projections are appropriately stress tested for one or multiple downside scenarios.

Transactions are reviewed at least quarterly to determine variance from financial plans, the risk implications thereof, and the accuracy of risk ratings and accrual status.

Collateral and “enterprise” valuations are derived with a proper degree of independence and consider potential value erosion.

Collateral liquidation and asset sale estimates are conservative.

Potential collateral shortfalls are identified and factored into risk rating, accrual, and allowance for loan and lease loss decisions.

Contingency plans anticipate changing conditions in debt or equity markets when exposures rely on refinancing or re-capitalization.

The borrower is adequately protected from interest rate and foreign exchange risks.

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