Ratios and Covenants in Underwriting Commercial Loans 1 Credit
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As businesses embark on their financial journeys, it's crucial to understand the nuances of loan agreements.
Conditions set out certain requirements that a borrower must meet at the inception of the loan, e.g., adequate insurance, taxes are current, fixed assets in good order, etc., but covenants govern what a borrower must do (positive covenants) and what a borrower may not do (negative covenants).
Covenants may be qualitative or quantitative. For example, a positive qualitative covenant might be the requirement to provide a quarterly financial statement no later than the 15th day after the quarter closing date, and a positive quantitative covenant might be that the borrower must meet a current ratio of 2.0x. Conversely, negative qualitative covenants could restrict additional borrowing without prior bank consent, and negative quantitative covenants might cap the debt-to-worth ratio at, say 2.5x.
Commercial bankers strategically utilize ratios within covenants as a risk management tool, ensuring borrowers adhere to terms and promptly repay loans. These ratios act as benchmarks, facilitating a proactive approach to risk mitigation and fostering healthy lending relationships.
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Join this CPE Finance course that will explain what and why ratios are commonly used in loan agreements and in what kind of financial covenants they work best.
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A frequent speaker, instructor, advisor and writer on credit risk and commercial banking topics and issues, Dev is principal of Devon Risk Advisory Group and engages in consulting, speaking and training on a wide range of risk, credit, and lending topics. As former SVP and senior credit policy officer at SunTrust Bank, Atlanta, he was responsible for developing, implementing, and administering credit policies for SunTrust's wholesale lines of business--commercial, commercial real estate, corporate investment banking, capital markets, business banking and private wealth management. He also spent three years as managing director and credit approver in SunTrust's Florida commercial lending and corporate investment banking areas, respectively. Prior to SunTrust, Dev was chief credit officer for Barnett Bank's Palm Beach region. Besides stints at other banks in Florida, Kansas City, and Ohio, Dev's experiences outside of banking include CFO of a Honolulu construction company, combat engineer officer in the U.S. Army, and college economics instructor in Hawaii, Missouri, and Florida. A graduate of Ohio State University and the ABA Stonier Graduate School of Banking, he earned his M.B.A. from the University of Hawaii.
Dev serves as an instructor at the Stonier Graduate School of Banking, the Southwestern Graduate School of Banking, and the American Bankers Association's (ABA) Commercial Lending School. His school, conference, and workshop audiences have included participants drawn from the ABA, RMA, OCC, Federal Reserve, FDIC, FFIEC, SBA, the Institute of Management Accountants (IMA) and the AICPA. He worked with RMA to develop, implement, and teach its Critical Thinking course.
Dev has written about credit risk management, financial analysis and related subjects for the ABA's Commercial Insights, the Risk Management Association's RMA Journal, the IMA’s Strategic Finance and other business professional journals. He is the author of Analyzing Construction Contractors and its related RMA workshop. A past national chair of RMA and former Florida Chapter president, Dev serves as a member of the RMA Journal's advisory board. He represented the banking industry as a member of the Financial Accounting Standards Board’s Private Company Council, which reviews and recommends changes to existing and proposed generally accepted accounting principles that make them more cost-effective for privately held companies. Finally, he has consulted on credit risk issues with banks in Morocco, Egypt, and Angola through the US State Department's Financial Service Volunteer Corps (FSVC).
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WF
Very professional. Handouts are very helpful and will serve as a checklist for my practice in advising clients who are engaged in financing their commercial real estate projects. Even though this is more "bank lending" related and applies to all facets of various operating companies, it's particularly helpful to have some very simple guidelines for how to evaluate risk, liquidity, the value of the collateral, etc.
KA
It was great learning and I understood lot of new things about corporate loans.
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