TOOL E5
This tool will help you analyse how much reliance to place on the non-financial scenarios determining a client’s debt service capacity, and how to monitor the bank’s and the client’s position as the projected outlook differs from reality.
Analysis – PAWS
Present Position
• Relate to past performance
• Where are we now?
• Are there any gaps between the final historic figures and the first year of projections
• Relate to existing bank facilities and proposed repayments
Assumptions
• Who derived the projections?
• Do you agree with the business scenarios driving future cash flow?
• Take a ‘cash drivers’ approach:
– Income Statement > margins and volumes
– Asset Conversion Cycle > volume and time
– Capital Expenditure > ability to delay or to stop
– Equity > access to markets and dividend policy
– Debt > maturity profile and interest rates
• Consider financing costs
• Compare to past performance
What if?
• Sensitivity analysis should be based on the major business factors identified during business risk analysis.
• Use common sense. Are the projections reasonable?
Strategy
• Almost certainly the projections will be wrong. If the company fails to meet its projections, what is our monitoring strategy to ensure remedial action is taken by the client and the bank?
Monitoring – CLAW
Controls
• How often do we receive projections?
• Relate to existing bank facilities and proposed repayments updated projections?
• Are historic figures / actuals compared to previous projections?
• What controls do we have built in – are there internal triggers:
‒ on business factor assumptions
‒ set tighter than financial covenants?
‒ does the stress case breach the financial covenants?
Legal
• Are there any legal constraints on us which may prevent our taking action?
• What effective legal remedies do we have on covenant breach?
Action
• What early action can we take? Is our deal bilateral or unilateral?
• What can the company do to restore the situation?
• Who will call the shots when the projections undershoot?
Way Out
• How does the bank ensure it will take early action and protect its repayment?
• Does the bank have alternative exits – collateral, guarantees etc.? Are they really an alternative in times of stress?
