BWBB 3083 CORPORATE BANKING

FIRST SEMESTER 2019/2020 SESSION (A191)

CASE STUDY

TITLE :
COVALENT (TERM LOAN FOR EXPANSION AND MODERNIZATION)

SUBMITTED TO :
DR.LOGASVATHI MURUGIAH

(GROUP A)

PREPARED BY :
NO. NAME MATRIX NUMBER
1.
2.
3.
4. WAN SYARAFANA BINTI WAN YUSAINI 259071
5. NUR TASNEEM BT MOHD ZIN 259018
6. NURUL SYAZWANI BINTI MOHAMAD RAFLLI 258968

Submitted date
(14th November 2019)
 CONTENT

NO. QUESTIONS PAGE

1. Evaluate the strengths of CLPL based on its past financials 1–2

2.

3.

Identify and discuss the special term and conditions to be

4. stipulated by bank to mitigate the risk in the proposal?

Does CLPL need additional finance for its working

5 capital,given its expansion and modernization?
QUESTION 1

1. Evaluate the strengths of CLPL based on its past financials

The Commercial Development Bank of India can evaluate the strengths of Covalent
Laboratories Private Ltd. (CLPL) based on its past financial. The past financials show the Return
of Assets (ROA). ROA is used to measure the performance of the company. As we can see from
the financial year by CLPL's, the amount of ROA is decreasing in the year 2011, but starting from
the year 2012 until 2018 the performance profitability is increased and in the year 2019 decrease
and 2020 increase again. This shows that, a good sign where the company able to make a profit
from their total assets in the 6 years. The higher the percentage of ratio, the better it is for the
company. Therefore, the CLPL can manage their assets efficiently to produce profits during a
period.

Then, the financial leverage ratio or debt ratio focuses on long term debt measure the
value of equity in a company by analyzing its overall debt. This ratio is used to compare debt or
equity to assets as well as shares outstanding to measure the true value of the company equity.
From the financial year by the CLPL, the debt-equity ratio in the year 2011 until 2014 fluctuates
but from the year 2015 until 2020 become increasing. Higher debt can results in high financial risk
that a firm can face in the future. This shows that the company has low debt and low risk.

After that, the interest coverage ratio is used to see how well a firm can pay the interest
on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. The
Covalent Laboratories Private Ltd.(CLPL) shows the financial year for interest coverage ratio in
the year 2011 until 2012 is decrease and in the year 2013 until 2020 is increased. This shows that
the CLPL has a high coverage ratio. It is better for the company because not burdened by the debt
expense. Overall, the interest coverage ratio by the CLPL is a very good assessment of the
company's short-term financial health.
 Next, the debt-service coverage ratio (DSCR) is a measurement of the cash flow available
to pay current debt obligations. The debt-service coverage ratio by the CLPL is good. At the year
2011 until 2013 the DSCR is decreased. In the year 2014 until 2020 the DSCR is increasing. This
shows that the debt-service coverage ratio by CLPL is slightly more comprehensive. The assesses
the ability of the CLPL to meet its minimum principal and interest payments, including sinking
fund payments, for a given period is stable.

Other than that, the fixed asset coverage ratio is the number of times the value of fixed
assets (after providing depreciation) covers term liabilities. The fixed asset coverage ratio by the
CLPL fluctuated from the year 2011 until 2014. In the year 2015 until 2020 the fixed asset
coverage ratio becomes increase. It shows that the CLPL can cover term liabilities.

Besides, the current ratio reflects the current assets cover the current liabilities
quantitatively at any point in time. It is the barometer of the short term liquidity of the company.
In other words, the working capital resources position is reflected in the current ratio. The net
working capital by the CLPL is increasing year by year from the year 2012 until 2020. This shows
that CLPL is in good condition. It is because of the higher the ratio, the better the liquidity. The
amount of liquid assets is available to repay short-term debts.
QUESTION 4

4. Identify and discuss the special term and conditions to be stipulated by bank to mitigate
the risk in the proposal?

Bank should evaluate the company using five Cs of credit this system used by lenders to
gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the
borrower and conditions of the loan, attempting to estimate the chance of default and,
consequently, the risk of a financial loss for the lender. The five Cs of credit are character,
capacity, capital, collateral, and conditions. First look at a credit history a borrower's reputation
or track record for repaying debts. This information appears on the borrower's credit reports.
Credit reports contain detailed information about how much an applicant has borrowed in the
past and whether they have repaid loans on time. These reports also contain information on
collection accounts and bankruptcies’. Bank also cans double check in CTOS whether company
in good credit history or bankrupt.

Next capacity measures the borrower's ability to repay a loan by comparing income
against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. Lenders
calculate DTI by adding together a borrower's total monthly debt payments and dividing that by
the borrower's gross monthly income. The lower an applicant's DTI, the better the chance of
qualifying for a new loan. . Company had leverage financial strength marked by low liquidity
(had explain in current ratio) and higher leverage levels in 31 march 2014 in total outside
liability/ total networking company got 2.29 times, but after compare with CDBI’s loan
evaluation parameters the maximum is 3:1 so it consider company got higher leverage ratio.so it
might not be able to services its debt obligation to bank in the long them. So company indicated
to face in credit risk that occur default on a debt that may arise from a borrower failing to make
required payments. In the first resort, the risk is that of the lender and includes lost principal and
interest, disruption to cash flows, and increased collection costs

Then capital, bank also need consider any capital the borrower puts toward a potential
investment. A large contribution by the borrower decreases the chance of default. Furthermore,
bank should look at collateral .Company should obtain a secured loan, providing collateral is a
must. To a bank, collateral is simply defined as property that secures a loan or other debt; so that
the lender may be seize that property if the you fail to make proper payments on the loan. It gives
the bank the assurance that if the borrower defaults on the loan, the lender can get something
back by repossessing the collateral. Current ratio is in 31 march 2014 is1.31.means that the
company will indicate that a firm may have difficulty meeting current obligations. That company
in below amount compare with CDBI’s loan evaluation parameters, which is1.25 times for
current ratio. The company cash accrual might not be sufficient to meet the promoter
contribution for the proposed project, incremental net working capital requirement and term loan
obligation. This company may face liquidity risk that a company not able to meet short term
financial demands. This occurs due to the inability to convert a security or hard asset to cash
without a loss of capital and/or income in the process. Lastly looked at condition to refer to how
a borrower intends to use the money. So easy to bank give loan on that specific loan.
QUESTION 5

5. Does CLPL need additional finance for its working capital, given its expansion and
modernization?