Lending and Borrowing Decisions (AFCP856)

New unit offered in 2018. Formerly known as Credit and Lending Decisions (AFCP856).

This unit focuses on credit risk from the perspectives of both a lender – taking credit risk – and a borrower – accessing debt capital and other financial services. This dual view allows us to discover how bankers assess default risk, make the decision to lend and structure loans to mitigate key risks, while also building an appreciation of how a business can shape and influence the terms on which debt capital is accessed from bank lenders to meet the borrower’s needs. After a review of how various types of lending products can be matched to borrowers’ requirements, we examine the core concepts of probability of default, loss given default and exposure at default. These concepts inform our discussion of how banks manage credit risks through the structure of the loan balanced against providing workable access to funding for the borrower. The obligations of borrowers under typical corporate loan documentation are discussed, including the practical implications for managing the banker-borrower relationship (from both perspectives) in normal times and when loans are becoming distressed. Finally, the management of credit risk in financial institutions, including the interface with regulators, the governance framework and culture, is presented.

Learning Outcomes:

  1. Understand how the nature of the borrower and the features of a loan influence credit risk parameters (probability of default, loss given default and exposure at default) and the style of credit decisioning a lender will apply.
  2. Understand how a borrower’s needs influence the selection of the appropriate loan product and lending structure for debt financing; including the significance of unsecured, secured and subordinated characteristics.
  3. Recognise the importance of aligning the needs of a borrower and the risks a lender is prepared to accept and be able to outline the structural and documentary mechanisms for achieving this (including the functions performed by representations and warranties, financial covenants, undertaking, events of default and review).
  4. Describe the process through which a potential credit facility for a business/corporation is defined, evaluated, structured, decisioned and monitored.
  5. Understand (in principle) the issues related to management or problem loans from both the lender’s and borrower’s perspective.
  6. Appreciate how issues of regulation, governance, risk culture and portfolio composition in a large financial institution influence the relationship between the lender and the borrower.

Topics:

  1. The Debt Stakeholder as an Investor
  2. The Borrower and the Loan
  3. The Process to the Credit Decision
  4. Structuring the Loan/Credit Facility
  5. The Banker-Borrower Relationship
  6. Credit Risk in Financial Institutions

Prerequisite Units:

Lecturers:

Unit Guides:

To be advised.

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