TOOL J3
Does the Deal Structure Increase or Decrease Risk for the Bank?
| Deal risk will be higher if: | |
| Choice of legal counterparty | – We are structurally subordinated because of the nature of our obligor (e.g. a special purpose vehicle) – Exposure to different legal c/p’s in the same group could lead to conflict of interest for us and other banks. E.g. lending to both Holdco and Opco |
| Repayment schedule | – The tenor of our facility is longer than facilities from other debt providers – The repayment schedule of our facility is back-ended or bullet – There are repayments on subordinated debt before our facility is repaid |
| Collateral | – There is a strong correlation of risk between the primary source of repayment and the collateral – Regulatory criteria have not been met (e.g. conditions for cash-backed facilities) – We cannot physically control & / or realise security in the stress scenario – We cannot cross-collateralise our different facilities |
| Products | – We cannot call default / accelerate all our facilities at the same time – We cannot call for a cash deposit on our unfunded facilities – We have facilities with the same legal counterparty with different debt priority positions |
| Systems / Operational risk | – We cannot accurately price risk and measure economic profit – We cannot control disbursement of funds & collect payments – The internal processes, procedures, models & systems to monitor & control risks, exposure, conditions & -covenants are not in place |
| Reputational / Legal risk | – We do not have positive legal / tax opinions – The bank’s integrity would be questioned if the transaction became public knowledge |
| Reliance on capital and syndicated markets for funding, repayment or refinancing | – Repayment is reliant on equity raising or bond issuance – There are no pricing incentives for a bridge facility – We cannot assign or sell the asset in the secondary market – We do not have market flex / force majeur clauses – We have limited voting power / influence on decisions check: 1. The definition of majority banks 2. The composition of the syndicate 3.The quality of the other participants in the deal |
| Internal treasury risk | – The size of the transaction is outside the market norm – There is a potential lack of liquidity in the relevant financial markets – We don’t have standard market disruption mechanics – We have not maximised netting arrangements – Break clauses have not been negotiated on long term derivatives |
