CREDIT ANALYSIS

TOBLecturing notes no 4

Lecture outline

Objecives of CA Process of CA The five C’s Information sources for CA Credit application structure Classification of credits

Credit analysis - objectives

Identify the risks in lending situations Determine the company’s debt service

capability Make recommendations as to proper type

and structure of the loan

Credit granting process

Application - gather preliminary information.

Investigation - verify preliminary information and gather additional information.

Credit decision - consider facts and make decision to accept or decline.

Loan Close.

The five C’s – THE BASIC COMPONENTS Character Capacity Capital Collateral Conditions

Risks analysis

Identify the risks - business risk - performance risk - financial risk - management risk

Evaluate the risks Mitigate the risks

Sources of information

Customer interview Internal sources External sources

General format of an analysis

Description of the loan Description of the company Credit history Analysis of the Market/Industry Financial Analysis of Borrower Cash Flow and Projected Cash Flow Analysis Collateral analysis SWOT analysis Credit scoring Credit Decision

Description Of The Loan

Purpose Amount Repayment Source Terms Security

DESCRIPTION OF THE LOAN Type, amount, period: “investment credit” of 180,000 EUR on a period of

3 years. Objective: acquiring a printing equipment “Presse offset Heidelberg

Druckmachine”, whose total value is 212,000 EUR This equipment will be financed in the following way: - 15% from the equipment price will be paid by the client(10% from the

value has already been paid as advance money ) -85% (180,000EUR) through the requested credit The credit will be guaranteed with 1st rank mortgage on building and land

in total area of 7800 sqm situated in Bucharest. The accepted value of the collateral is 196,500 EUR.

Till now all the company’s investments were made from its own funds and had as objective the permanent improvement of the printing equipment. This led to the increase of the quality of the products and an increase in the number of customers.

In March 2003 the company acquired a real estate building in Constanta - 5.412 bill ROL acquisition price which spent all the internal fund needed for acquiring the printing equipment.

The reimbursement of the loan will be made monthly in equal installments, according to a schedule previously decided by both parties

The source of the reimbursement is the monthly cash flow of the company.

Description of the company

General issues (type, history, goal and operations)

Ownership structure Management description Production technology Product analysis Costing and pricing Future development and strategy

DESCRIPTION OF THE COMPANY

Company History Printing House joint stock company was set up in 1993 and has as main activity: printing, coping. Its

Social capital is 2 126 000 000 ROL. Ownership and management structure Main shareholders: Costel Mihai holds 58%, Diaconu Raluca

holds 33%, Radulescu Cosmin holds 5%, Popescu Dan holds 2%, Damian Andrei holds 2% Printing House has a dynamic management team composed of highly qualified professionals with

strong capabilities in their filed of activity. Three of the shareholders are also in management positions.

The market strategy of Printing House Joint Stock Company’s highlights the quality of the products. The company has also a price strategy by offering discounts (cash discounts, quantity discounts)

Description of the company’s activity and technological process The main activity of the company is printing. The company is a full service printer including all the

phases of the production: pre-press, printing and finishing. It prints all kind of materials such as newspapers, magazines, books, brochures, labels, forms, packages, business cards, calendars etc.

The technological procedures are complex and have the following stages: 1. Typing: graphical conception, paging, correction, film listing. 2. Editing of the imagines and coping them on aluminum slate 3. Printing with special equipment: 10,000 pages/hour, automotive ink 4. Sorting, cutting, biding, counting and wrapping.The company has a team of 123 employees.Subsidiaries and Related Business On January 2004 set up a new branch in Sibiu. The company from Sibiu has the same activity but is

independent from the one in Bucharest.

Credit history

Payment information about all types of accounts Relations with other banks or financial institutions Checking the Credit Information Bureau Database and

Payment Incident Bureau database Reports of events such as bankruptcies, judgements,

suits etc Details on late or missed payment Number of accounts with no late payments

CREDIT HISTORYBanking RelationshipsTill now Printing House hasn’t had any relation with Raiffeisen Bank.The banks the company is working with are:BCR Current account 2,168,418BRD Current account 1,680,748ALPHA BANK Current account 159,353

History of the Client’s LoansPrinting House Joint Stock Company doesn’t have any long-term loan, all the company’s debts and

investments being made from its internal sources.It has only 2 leasing contracts:Financial Leasing Monthly Payment Date Maturity Date BalanceAudi A4 full options 1028 EUR February 2003 January 2005 26,298 EUR Renault magnum 590 EUR June 2002 April 2005 12,011 EUR

Credit Information Bureau DatabaseAccording to the Credit Information Bureau statement, Printing House Joint Stock Company is not

present in database with any unpaid loans.

Payment Incident Bureau DatabaseAccording to the Payment Incident Bureau statement, Printing House Joint Stock Company is not

present in database with any incident.Taxes, Social Insurance to State Budget Printing House Joint Stock Company has paid all its debts to the state budget.

Analysis of the market/industry/economy Market

- market structure

- market size

- demand for the product

Analysis of the market/industry

The Romanian printing industry has been one of the most dynamic sectors of the economy in the last decade. Until 1989 in Romania there was only a printing house, the former Tipografia Casa Scanteii, over 1000 companies which have as main object the activity of printing.

STRUCTURE OF THE ROMANIAN PRINTING MARKET 2003

Magazines 18%

Books13%

Advertising materials

29%

Newspapers16%

Others(fiscal forms,lables,packaging)

24%

The market analysisThe Dynamic Forces of the Market

COMPETITION

Entry Barriers

Suppliers Customers

Substitute products

Company

CompetitorsSupplierscustomers

Main competitors Infopress Mega Press Holding Libedi Printing, Fed Print Imprimeriile Media Pro - IMP

Company’s suppliers Product % in total Payment Payment Acquisition suppliers term (days) method frequency

DormanSRL Services 4.16 30 Payment order monthly

SC.RTC S.A Paper 15.7 45 Payment order monthly

ImobConstanta Assets 23.5 - Payment order

Kubera SA Paper 7.12 60 Payment order once to months

ArhiDesignSRL Consumables 10.3 45 Payment order monthly

PrintManSRL Utilities 2.65 45 Payment order monthly

SilverInkSA Ink 8.93 30 Payment order monthly

EuropapierSA Paper 11.66 45 Payment order once to 3-4months

Others Others 15.98 30-60 Payment order seldom

Main customersCustomer Product Payment Payment Acquisition

term (days) method frequency

1.Humanitas School books 60 Payment order monthly2.Adevarul newspaper 15 Payment order monthly3. SNCFR Booklets, folders, 30 Payment order monthly

train schedule

4. Metro SA promotional materials 30 Payment order/Cash monthly5. Elite SA promotional materials 45 Payment order/Cash monthlyRomania labels

6. Editura Niculescu Books 60 Payment order monthly7. Ioana, Mama magazines 45 Payment order monthly

8. Petrom SA envelops 30 Payment order monthlylabels,packages

Industry/economy overview

Rate of industry growth Life cycle Industry development and trends Risks related to the industry Economic policy Government action Trends of inflation, unemployment, purchasing

power

Company’s Market Position

Due to the quality of the products and seriousness to its clients, the company succeeded in becoming a well-known company on printing market.

STRUCTURE OF PRINTING HOUSE JOINT STOCK COMPANY'S TUROVER

Advertising materials

28%

Newspapers9%

Others(fiscal forms,lables,packaging)

5%

Books26%

Magazines 32%

Swot analysis

Stenghts Weaknesses Opportunities Threats

SWOT ANALYSIS

Strength management experience and teams of professionals good position on the market long term relationships with the suppliers ability to pay debts on time Weaknesses negative cash flow in 2003 the company doesn’t have as activity publishing Opportunities increase and consolidation of the market share by the new investment development of the printing sector in Romania development of the school books following the new regulations of the Education Ministry Threats legislative changes strong competition in the field appearance on the market of new printing houses with improved technology

Collateral analysis

Types Characteristics/Features- marketable- ascertainable- stable- transferable Valuation

COLLATERAL ANALYSIS

The credit will be guaranteed with 1st rank mortgage on real estate -building and land in total area of 7800 sq. situated in Bucharest. The assets are owned by the Printing House Joint Stock Company.

The market value of the collateral is 262,000 EUR. To this value the bank applies a risk coefficient of 25% resulting the accepted value of the collateral of 196,5000 EUR

The value of the collateral cover the amount of the total loan agreement (the loan amount, the amount of interest rate payable in the course of the 1st year), and the expenses related to the collateral enforcement .

RISK EVALUATION

KEY RISKS MITIGATION FACTORS Business Risk Company’s management has experience in

this domain, and the company extended its activity quickly.

Market Risk The general economic growth will determine also the development of printing activity. By renewing the printing equipment, the company will adapt quicker to market needs and will succeed in maintaining its position on the market

Repayment risk Good financials, good reputation, ability to pay debts on time

Foreign exchange risk The profit margin obtained by the company will cover the unfavorable differences of the foreign exchange.

Financial analysis of the borrower

Liquidity ratios Solvency ratios Profitability ratios Efficiency ratios

Cash flow analysis, turnover evolution etc

Financial analysis of the borrower. Evolution of the turnover In terms of turnover, 2003 was good year for the company, the increase representing about

21,9% as compared to 2002. There is a seasonally in the turnover in the second half of the year due to the selling of schoolbooks. Only a small part of the turnover is due to the exports. The decrease of the turnover during the 2002 compared to 2001 is due to the repair of old equipment, which implied both expenses and activity stagnation due to non-working machines.

Evolution of the Turnover 2003

ROL 0

ROL 1,000,000

ROL 2,000,000

ROL 3,000,000

ROL 4,000,000

ROL 5,000,000

ROL 6,000,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Decthd.ROL

Current ratio

Current ratio = Current assets/Current debts Criteria Evaluation >1,5 x 1 >1,2 x 2 >1 x 3 >= 0,8 x 4 <0,8 x 5

Solvability

Solvability = Total assets/total debts Criteria Evaluation >1,5 x 1 >1,2 x 2 >1 x 3 >= 0,8 x 4 <0,8 x 5

Operating profit margin

Operating profit margin = Operating profit/ sales x 100

Criteria Evaluation >10% 1 >7% 2 >3% 3 >= 0% 4 < 0(loss) 5

Interest cover

Interest Cover = Operating profit/ Interest expenses

Criteria Evaluation > 4 x 1 >3 x 2 >2 x 3 >= 1x 4 < 1 x 5

Equity ratio

Equity ratio = Total Equity/ Total Assets Criteria Evaluation >35% 1 >20% 2 >10% 3 >= 0% 4 < 0% 5

Credit scoring

Qualitative criteria

(management quality, business strategy, collateral received)

Quantitative criteria (current ratio, solvability, operating profit margin, interest cover, equity ratio)

Credit scoring

 

Evaluation criteria Weight Values Mark Evaluation (w*m)

Qualitative criteria

Management quality, business strategy,collateral received

21% Accumulated experience within he main firm activity, good business strategy, well

known company

1 0.21

Ownership structure 4% Majority owned by management

2 0.08

Quantitative criteria

Current ratio: Current

assets/Current debts 18% 1.1 3 0.54

Solvability: Total assets/total debts

18% 2.83 1 0.18

Operating profit margin: Operating profit/ sales x 100

12% 15.5% 1 0.12

Interest cover: Operating profit/ Interest expenses

18% 34.3 1 0.18

Equity ratio: Equity / total assets x 100

9% 64.60% 1 0.09

Client rating- financial performance

100% 1.4 - A

Financial performance

Client’s mark Client rating- financial performance

1,00-2,00 A 2,01-3,00 B 3,01-4,00 C 4,01-4,50 D 4,51-5,00 E

Credit decision

After analyzing the financial situation of the company, the score determines the credit grade :A: 4.20-5.00 or 1.00- 2.00B: 3.40-4.19 2.01-3.00C: 2.60-3.39 3.01-4.00D: 1.80-2.59 4.01-4.50E: 1.00-1.79 4.51- 5.00

According to the observance of the reimbursement terms -current loans- there are not at maturity or the

installments were paid in due time according to the stipulations of the contract;

-loans with deferred payments-the due installments and the related interests were not paid within 30 days after maturity;

-due loans-the payments of the credit installments and the related interests exceeded more than 30 days;

Credit classification according to the risk

Following the valuation of the customer’s financial performances, the credits will be included in of the following classes:

Class A - borrowers with profitable activities and solid financial activities, with no problems in returning the loan

Class B - borrowers with good financial standing at present, but who cannot maintain it in the next period

Class C - borrowers with satisfactory economic position but with a tendency of worsening their economic efficiency and financial ratios

Class D - the economic and financial standing is characterized by inferior ratios and varying activities between satisfactory and unsatisfactory

Class E - borrowers with unprofitable activity, involving uncertainty in repaying the loan

Category of the credit

Category of the credit

Current credit

Credit with deffered payment

Due Credit

A Performant credit

Credit under supervision Credit under standard

B Credit under supervision

Credit under standard Doubtful Credit

C Credit under standard

Doubtful Credit Credit with losses

D Doubtful Credit

Credit with losses Credit with losses

E Credit with losses

Credit with losses Credit with losses

CREDIT COMMISSION DECISION

Credit Commission approved the “investment credit” in the following conditions: Credit type: “investment credit” Purpose: acquisition of printing equipment Presse offset Heidelberg Druckmachine Amount: 180,000 EUR Interest: 8.2% Collateral: 1st rank mortgage on building and land; Contracts date: March 2004 Maturity date: February 2007 Other conditions: -The company won’t apply for other credits without the written approval of Raiffeisen

Bank -The company will carry on at least 75% of the payments through Raiffeisen Bank -The company won’t pay dividends and the shareholders won’t withdraw moneys

without the written approval of Raiffeisen bank. In the case the company doesn’t fulfill one of the above conditions, Raiffeisen Bank has

the right to increase the interest with 2% or to consider the contract null and to demand the payment in advance for the obligations.

References

Dima.M. A, Agapie, A., Orzea, I., Moroianu, M. (2010). Banking. Theory, cases and applications, Ed ASE

Dima, M.A., (2010), Credit Analysis. Case studies, Ed. Business Excellence

Casu, B., Giraradone, C., Molyneux (2006). Introduction to Banking, Prentice Hall

Mishkin, F. (2007). The Economics of Money, Banking and Financial Markets, Prentice Hall