Lending and Borrowing Decisions (AFCP856)

New for 2018. Formerly Credit and Lending Decisions.

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 loan and the class of borrower will influence the style of credit decisioning on the quantitative (credit scoring) - qualitative (expert judgement) continuum.
  2. Appreciate the range of methods and products available for debt financing and how to apply them appropriately; including the significance of unsecured, secured and subordinated features.
  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.
  6. Appreciate the importance of culture, effective governance and regulation to credit processes in a large financial institution.

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. Managing Loans and Credit Facilities
  6. Credit Risk in Financial Institutions

Prerequisite Units:

Lecturers:

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