Key Lessons (1)
- Related parties are always bad unless proven otherwise
- Tell a lie from a lie
- 50 shades of grey
- Substance over form (always ascertain the nature!)
- Ascertain behavior of Borrower (regardless if it is listed company or not)
- When we lend money, it should be for the purchase of assets that will generate economic usage
- Is your collective aggregate assets on balance sheet generating sufficient cashflows to pay your liabilities owners? Are you assets productive in generating enough returns?
- Margin of safety/error
- Higher variability → seek higher equity buffer to absorb losses
- Sustainability gives you flexibility and be ok to accept a lower DSC
- Account Conduct
- Positive account of conduct does not mean it is good credit
- Survival bias (If account of conduct is bad, account would have been exited).
- In SG, no bank will give up customer
- Ask the banker the right questions and you may get “unexpected” additional info that will be critical towards making the credit decision
- Prioritize questions to ask the bankers
- Window dressing aka creative accounting is a norm. Identify and assess the impact.
Key Lessons (2)
- EBITDA is an accurate proxy for Cash Flow only when everything you have sold are 100% collectible (NCAO is most accurate)
- We are not in the best position to judge which business is good, credit’s role is to ensure that client has sufficient Equity Buffer to burn
- 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 the private bank 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
- Take credit risk on credible listed 3rd party → okay
- take credit risk on related China parties → not okay
Key Lessons (3)
- Industry trends do not affect/benefit every Borrower in the same way
- Always match balance sheet items with P&L
- Increase in buildings & improvements → increase in depreciation, loans and revenue in P&L
- For listed company, always compare NBV against market cap
- Whether gearing 1.2x or 2x is ok depends on DSC
- B dependent on key debtors to pay them back, in turn to pay the bank, if debtors do not pay, our cash facilities will essentially be financing the shortfall
- Cost structure: Fixed costs vs variable costs and breakeven
- Coy can be loss making and still in business as ling as they can pay their fixed cash expenses
- Y (expenses) =mx (variable against volume x) + c (fixed costs)
- MRA should gives you a picture, details of the picture should be described in the memo
- Coy makes $10m
- Retain in company and purchase a pty (EB remains
- Declare dividends
- No JSPG provided = leakage of $10m
- JSPG provided
- Keep as cash (difficult to trace, unless pledged as FD to bank)
- Buy pty (preferable, as it can be traced and checked against title deed)
Key Lessons (4)
- When assessing the materiality to Equity Buffer, question to ask is: will this amount affect coy’s going concern
- ETC (bank’s own equity buffer that is made up from Tier1/2 capital), RWA (better credit quality/credit rating = lower provision)
- Back your judgment with numbers. Judgment to be empirical based and based on market info
- Ask for financials of key entities in the group (non-borrowers included)
- J-curve (for any new biz, losses in 1st 2 years is normal, BUT key is if they have enough equity to buffer/sustain past this period)
- AR (future payment from debtors) = tenancy agreement (AR from tenants in the upcoming x mths)
- Acquisition/Disposal, to consider:
- Purchase/payment consideration (cash or shares)
- Price to NBV
- Who bought? Who sod?
- Any liabilities/AR outstanding
- What’s the impact on financials? Assess repayment based on (i) organic and (ii) organic + target (do a base and stressed case scenarios)
- Off balance liabilities/contingent liabilities
- Incur sig debt? Impact on capital structure
- Valuation
- Conducted by? Commissioned by? Projections provided by? Valued by DCF, or RV or?
Key Lessons (5)
- When there is insufficient equity in the business, bank lender is supporting as though it is a shareholder/equity owner
- Other banks pulled their facilities → Warning sign (Borrower requests the Bank to extend additional facilities → you don’t want to be the last bank left and stuck, especially with committed facilities)
- For trading concern, always be clear on trade flow, payment flow and terms of trade
- Shareholder loans
- Shows commitment, but the flipside is that it shows that there are underlying problems with the business
- Scrapping the bottom situation, withdrawal when coy remains in a bad shape may suggest loss of confidence of shareholders be wary of such situations
- Unrelated diversification (% relative to core business/TNW)
- Du Pont: Business perspective, indicates different business models (relate to BCG matrix), assess if company has been able to execute their strategy well, if they have been, numbers should be fairly stable (ISC/DSC: Banker’s perspective)
- To improve ROE, B can sell assets (non-revenue generating) or increase leverage (especially for low margin businesses like trading)
- Most country, small companies remain small because it is too expensive for them to lever up.
- Depends on biz model and industry
Key Lessons (6)
- Set up different entities so that when I go bankrupt, it does not affect other entities in the group (Legal structure as a limited liability company)
- Lenders’ position on claim on CF is dynamic (business owners can always augment the priority of claim by declaring dividends when company is making losses etc.., credit should assess the materiality)
- To assess if CCC is long, depends on the business model and industry
- High APD or low APD better → assess trends and movements
- FX gains and losses should not be large enough to affect profitability (else, likely to involve speculation)
- Personal and company balance sheet
- Balance sheet is a closed system, Leakages via
- Dividends
- Related parties txn
- BVI coy
- Our role: manage the leaks, set covenants and terms to protect the CF ad mitigate and not to dictate how business should be run
- Coy inflate assets and deflate liabilities to maximise TNW, coy inflate revenue, deflate expenses to maximise profit (in turns to maximise networth through higher retained earnings) Related parties txn inflates balance sheet
- Identify any form of creative accounting and adjust Credit rating accordingly
Key Lessons (7)
- Undiversified business → usually request for higher Equity Buffer
- Inventory → AR → Cash
- Analysis
- Primary: How much inventory moving in/out of warehouse, analyse the day rate, utilisation rate to determine the topine (to ask and gather info during site visits and conversations with borrower)
- Secondary: AR listing, ACRA, annual reports
- Tertiary: Credit reports
- Follow the money and not the big talker
- Past but unreported (check crediting statements if main op accounts with the Bank)
- Do pro-forma conso to ascertain the true CF that the group is generating as a whole
- Eliminate the RP txn to obtain the true EBITDA of the group
- For entities with losses, take the losses at 100% (essential that the losses are funded by the profitable entities)
- To lease or purchase ppty depends on whether coy wants to build balance sheet strength
- We prefer B to buy ppty (after paying off debt, balance is retained as equity)
- Asset light (Lease) → more for equity shareholders
- Eg. Hiap Tong (sale and leaseback) → increase ROE, CF and SP
- Shares repurchase: form of cash out for promoters (weakens capital structure), what’s the impact on DSC and can coy generate enough cash to repay its obligations
Key Lessons (8)
- Privatization
- Coy trading below valuation/NBV
- Promoter owns majority of shares
- Asset quality if good (quality of NBV > market cap)
- Taking a position vs hedging
- Hedging’s purpose is to fix COGS
- Credit’s perspective: How will this affect CF/DSC and their ability to pay obligations
- Determine if client has sufficient equity to handle max downsides/losses
- Ensure that coy’s core CF is ring-fenced and not used to top up losses on investment (avoid co-mingling of funds)
- Dividends
- Declared: recorded as current liabilities
- Payable
- Paid: recorded in CF
- Credit bases vs legal bases
- If B has other entities with substantial exposures with us in the same group, they may come in to save B if anything bad happens (B has incentive not to tarnish banking relationship of the “bigger entity” with the Bank)
- Plan your account strategy upfront and state it clearly in the memo
Key Lessons (9)
- Check against previous memos to find clues
- Decrease cash balances maintained with the private banking arm
- Sold off property previously pledged to the Bank → sign of “Scrapping the bottom”
- Don’t wait for perfect information to form a view
- There must be a market for the company’s business and there must be willing third party purchasers
- Don’t say “bulk of facilities are trade-related” → quantify it
- TCL is TCL: nothing to mitigate, can only be mitigated with operational CF (rule of thumb: JSPG to be 3x more for than TCL for TCL to be sufficiently mitigated), you only take TCL for companies that are doing well. TCL is not mitigated by TNW (TNW is a result)
- Always cover for downside
- FSV, quantify the expected losses
- Be objective and always think about the exit plan (eg: source of repayment is IPO proceeds → analyze if in the case IPO does not happen, can coy service their o/s obligations based on their BAU basis? DSC?
- Consignment: give credit for them to push sales and clear stocks
- Offshore companies registered in tax havens
- Cannot trace the UBO
- Intent: minimise duty and taxes
