CASE STUDY

A. Identify the issues, problems, and opportunities.

B. Analyze the issues, problems, and opportunities.
- filter the info given
- identify from whose perspective
- for Jackson’s case, we are going to analyze as a lender
1. Qualitative
 C’s of credit
 Character
 Capacity
 Capital
 Collateral
 Conditions
o Industry
 PESTLE
 Competitive Analysis
 Suppliers
2. Quantitative
 Look if the party has the capacity to pay
 Financial Ratio Analysis
o Liquidity and Activity ratios
o Leverage ratios
o Profitability Analysis
 Analysis of Cash Flow
o Analyze sources and uses of funds over the past months
 Review direct method, indirect method
 Prepare projected cash flow to see if the company will have excess cash to be able to pay the loan
 Sensitivity Analysis
o Will deal with the uncertainty
o It will answer the what if
a. Best case scenario
b. Worst case scenario
c. Most likely scenario

C. Develop and evaluate alternative solutions.

 As a lender, what are your alternatives
o What are the pros and cons of the alternatives?

D. Make recommendations for action

 Choosing from the alternatives
 The recommendation should point to the problem
Evaluating Commercial Loan Requests and Managing Credit Risk

Qualitative Aspects of Lending

- Quality of the data
- Quality of Management
o Who operates the business?
o Are they competent?
o Do they have the capability?
o Do they have the experience?
o There should be a program of succession
- Borrower’s character and commitment to repay the loan
o Character is the most important of the 5 Cs
 It talks about the integrity of the management
o Look at the history
 What are his previous dealings that leads to good character?
 Is he a person that honors commitment?
 Ex: bouncing of checks
o Credit view data
- Quality of the company’s product
o It says how the business runs the business
- Economic and industry-specific factors
o Is the economic environment conducive for the business to operate
 PESTLE
 Competitive Analysis
 Suppliers

Key Questions in Analyzing a Loan Request

1. What is the character of the borrower, the nature of the loan request, and the quality of
information provided?
3. What will the loan proceeds be used for? (purpose)
- It will show the source of repayment
4. How much does the customer need to borrow?

2. What is the primary source of repayment, and when will the loan be repaid?
- If it is working capital loan, after the liquidation of inventories the borrower must pay. It depends
on the working capital cycle.
3. What is the secondary source of repayment, that is, what collateral, guarantees, or other cash
inflows are available?
- Collateral
- Guarantees
o SLC
Character of the Borrower, the Loan Request, and Quality of Data Provided

The foremost issue in assessing credit risk is determining a borrower’s commitment and ability to repay
debts in accordance with the terms of a loan agreement.

An individual’s honesty, integrity, and work ethic typically evidence commitment.

The best indicators are the borrower’s financial history and personal references.

A loan officer should begin the credit analysis by analyzing the firm’s prior banking relationships,
dealings with suppliers and customers, and current record from appropriate credit bureaus.

When a borrower has missed past debt service payments or been involved in a default bankruptcy, the
bank should reconsider

Quality of Data Used

Management has considerable discretion within the guidelines of GAAP and thus can “window dress”
financial statements to make the results look better.

An analyst should review the following to assess accounting data quality:

- Areas of accounting choices in which estimates and judgments are required inputs
- Periods in which a change in account principle, method, key assumption has occurred
- Extraordinary and discretionary expenditures, as well as nonrecurring transactions
- Income and expense recognition that do not closely track cash flow
- Non-operating income, gains, and losses