CREDIT/ CASHFLOW
Golden Rule: Credit analysis comes first before any discussions.
No fish-market bargaining. All must be backed by Credit / Cashflow.
Know Your Customer, Know Your Cashflow
Not only do you have to know your customer, you also have to know your Cash Flow!
Know-Your-Client → Ultimate Beneficiary Owner (UBO)
Know-Your-Cashflow → Ultimate Economic Activity (UEA)
Objective: To obtain the most efficient allocation of resources
Identifying potential KYC issues – Steps to take
1. Google → Borrower name and website, company structure, related companies, company
- KYC of other subsidiaries, companies, relatives, investor
- Other sources: LinkedIn of promoter profile, Chinese/India news sources (instead of just relying on Google)
- KYC of suppliers and customers (companies that they procure from and companies that they are selling to)
2. Reasonable banker checks
- Cross-border checks, get overseas branches to conduct searches
- Verify address (PO box)
- Genuine business
- Documentary proof of commercial agreement
- Conduct background checks with industry contacts such as trade associations
- (Beware) Bank checks are not positive indicators (vested interest for you to refinance so that they can get out)
- Check with PB on AUM with the bank and the type of AUM – encumbered or otherwise?
- Verify end-to-end trade docs against transactions. Conduct due on key suppliers and key buyers so you know that there wont be circular motion of trade finance facilities
- PO Box
- Offshore companies registered in tax havens
- Trade hitlist – suppliers not on pre-approved list
Identifying potential KYC issues – Key Lessons
1. Insufficient Equity in Business to Support Proposed Requests
- Net worth is defined as shareholders’ equity plus Subordinated shareholders’ loans
- Extra due diligence is required when accepting collaterals from counterparties with negative net-worth in light of fraudulent preference consideration (Section 362 Insolvency, Restructuring & Dissolution Act)
- When debt obligation of a borrower is fully supported by unconditional, irrevocable and legally enforceable corporate guarantee from related parties, including parent companies, will analyze the pro-forma consolidated financials of the group ie the borrower and the guarantors.
- Examples of Discouraged Credits:
- Legal, effective and structural subordination
- Counterparties with negative net worth
2. Identify sources of funds for repayment
- Casino/Gaming (Refer to Prohibited Credits)
- Any exceptions to financing of military equipment and casino gaming establishments must be cleared by Compliance who shall determine whether escalation is required.
- Examples of Prohibited Credits:
- Casino/Gaming
- Military equipment
3. Availability of collateral should not be the primary credit consideration
Identifying UEA: Around the world in 80 days
Fahran’s Flex
To identify UEA
