Chapter 14 (8) Lending to Busine

Business loans: commercial and industrial (C&I) loans

• rank among the most important assets banks hold
• represent the earliest form of lending that banks carried out
• fierce competition in the business lending field

Types of Business Loans

Short-Term Loans to Business Firms

Self-Liquidating Inventory Loans

• These loans usually were used to finance the purchase of inventory – raw materials or finished goods to sell
• Such loans take advantage of the normal cash cycle inside a business firm
• There appears to be less of a need for traditional inventory financing
  • Due to the development of just in time (JIT) and supply chain management techniques

Working Capital Loans

• Short-run credit that lasts from a few days to one year
• Secured by accounts receivable or by pledges of inventory
• Carry a floating interest rate
• A commitment fee is charged on the unused portion of the credit line and sometimes on the entire amount of funds made available
• Compensating deposit balances may be required from the customer
  • Recently compensating deposit balances as a part of a business-loan arrangement has been on the decline

Interim Construction Financing

• Secured short-term loan used to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures

Security Dealer Financing

• Dealers in securities need short-term financing to purchase new securities and carry their existing portfolios of securities until they are sold to customers or reach maturity

Retailer and Equipment Financing

• Lenders support installment purchases of automobiles, home appliances, and other durable goods by financing the receivables that dealers selling these goods take on when they write installment contracts to cover customer purchases

Asset-Based Financing

• Credit secured by the shorter-term assets of a firm that are expected to roll over into cash in the future
• Assets: inventory or accounts receivable

Long-Term Loans to Business Firms

Term Business Loans

• fund longer-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year
• A lump-sum loan
• Repay in a series of monthly or quarterly installments

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细讲

Syndicated loan

• Credits extended by a group of banks to a single customer
• Large-scale and high-risk loans
• Accompanied by a weighty set of loan documentation and some standard legal agreements: legal jurisdiction

过程？

Parties

• Lead bank 牵头行 — one bank or joined by several banks.
  • gather information for use in judging the borrower’s creditworthiness (credit analysis, price the credit)
  • organize the loan (structure the credit)
  • sell it down to other participating banks (market the credit )
• Participating banks 参与行
  • At the invitation of lead bank，participate in loan syndicate, and provide loan according to the amount agreed (subscription).
• Correspondent Bank (or agent) 代理行
  • Responsible for lending and management after legal
    documents signed.
  • Usually the Lead Bank or its subsidiaries, but also can be determined through discussion between member banks.

Advantages:

- share risks
- facilitate the extension of credits
- enable large and medium-sized regional banks to participate in international lending activities

Disadvantage:

High risk!

Why need?

Take on sub investment-grade loans in the hope of scoring exceptional returns

Revolving Credit Financing 循环信用贷款

• Allows a customer to borrow up to a prespecified limit, repay all or a portion of the borrowing, and reborrow as necessary
• One of the most flexible of all business unsecured loans
• May be short-term or long-term

Characteristics:

• Credit line: The borrower may use or withdraw funds up to a pre-approved credit limit.
• Maturity
• Revolved
  1. The credit may be used repeatedly.
  2. The amount of available credit decreases and increases as funds are borrowed and then repaid.
  3. automatically renewed when the original debt is paid off

Interest rate:

The borrower makes payments based only on the amount they've actually used or withdrawn, plus interest.

1. Set or fixed interest rate
2. Floating rate: margin (markup rate) +base rate (LIBOR, SIBOR, HIBOR...)
   • base rate: range in maturity from a few days to a few months

Commitment fee: 承诺费

A fee paid to the bank for standing ready to lend, for any money that is undrawn (or the entire amount) on the revolver.

Project Loans

• Credit to finance large-scale, long-term and high- risk capital (infrastructure) projects
  • eg. power plant, oil refineries, high-grade highways, bridges, tunnels, railways, airports
• The borrower: the project itself

         Sponsors 
              |
Bank  ->  **Project**

Risks:

• Can the project be completed on time?
• Can the project generate enough products?
• Can the products of the project be sold successfully?

Two types of project finance

Pure project finance--Project finance without recourse

The debt is to be serviced only by cash flows attributable to the project itself.

• the lending bank has no right of recourse to the project sponsor.
• the lending bank must gain property guarantee from project’s assets in order to guarantee its own interest.

Project finance with recourse--limited recourse project finance

• The lending bank requires the third party other than the project to
  provide guarantee.
• The lending bank has right of recourse to the third party.
• However, the third party undertakes limited liabilities in their guaranteed amount.

Loans to Support the Acquisition of Other Business Firms 用于并购 – Leveraged Buyouts

• loans to finance mergers and acquisitions
• Leveraged buyouts (LBOs) usually involve acquiring a controlling interest in another firm with the use of a great deal of debt (leverage) to finance the transaction

Analyzing Business Loan Applications

• The importance of analyzing business loan applications
• large denomination that the lending institution itself may be at risk if the loan goes bad.

The most common sources of repayment for business loans:

1. The business borrower’s profits or cash flow
2. Business assets pledged as collateral behind the loan
3. A strong balance sheet with ample amounts of marketable assets and net worth
4. Guarantees given by the business, such as drawing on the owners’ personal property to backstop a loan

Analysis of a Business Borrower’s Financial Statements

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Analysis of a Business Borrower’s Financial Statements

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TODO： 指标截止书要知道指标体现哪方面！