casemark/managing-credit-approval-packages

Managing Credit Approval Packages

When To Use

• Preparing a credit approval memorandum (CAM) for new loan originations, renewals, or modifications
• Documenting a lending recommendation for credit committee or senior credit officer review
• Packaging borrower financials, deal structure, and risk mitigants into a single approval submission
• Supporting trade finance facilities (letters of credit, supply chain finance, trade loans) that require formal credit approval
• Consolidating annual review packages for existing credit exposures

Inputs To Gather

• Borrower information: Legal entity name, organizational structure, ownership/management bios, industry SIC/NAICS codes, years in business
• Financial statements: Minimum 3 years of audited or reviewed financials (balance sheet, income statement, cash flow); interim statements if available
• Tax returns: Business and personal guarantor returns for the corresponding periods
• Loan request details: Facility type (revolver, term loan, LOC, LC), requested amount, tenor, proposed pricing, fee structure, amortization schedule
• Collateral data: Appraisals, asset schedules, UCC search results, insurance certificates, environmental reports (Phase I/II if real estate secured)
• Existing exposure: Current outstanding balances, payment history, covenant compliance record, prior CAM decisions
• Third-party reports: Credit bureau reports (D&B, Experian business), industry benchmarks, credit rating agency data if rated
• Guarantor financials: Personal financial statements, liquidity verification for any individual guarantors

Workflow

1. Build the borrower profile

   • Summarize entity history, ownership structure, and management experience
   • Identify the borrower's primary revenue drivers and customer/supplier concentration risks
   • Note any related-entity transactions or affiliate lending considerations

2. Analyze financial performance

   • Spread financial statements into a standardized template (common-size and trend analysis)
   • Calculate key credit metrics: debt service coverage ratio (DSCR), leverage ratio (Debt/EBITDA), current ratio, fixed charge coverage, tangible net worth
   • Compare metrics against the institution's internal risk rating thresholds and industry medians
   • Identify trends — improving, stable, or deteriorating — and flag anomalies (one-time gains, unusual adjustments)

3. Structure the deal

   • State the requested facility type, amount, rate, tenor, and repayment terms
   • Define proposed covenants: financial (minimum DSCR, maximum leverage), reporting (frequency and type of financial deliverables), and negative covenants (restrictions on additional debt, dividends, asset sales)
   • Specify collateral package with advance rates and margining methodology (e.g., 80% on eligible A/R < 90 days, 50% on inventory at NLV)
   • Address guaranty structure — limited vs. unlimited, joint and several, guarantor net worth thresholds

4. Assess and mitigate risk

   • Assign a proposed internal risk rating with supporting rationale
   • Identify primary risks: credit/default risk, collateral risk, industry/market risk, concentration risk, regulatory risk
   • For each risk, document the specific mitigant (e.g., "Customer concentration mitigated by credit insurance on top-3 accounts and diversified backlog")
   • For trade finance facilities, address country risk, documentary compliance risk, and counterparty bank risk [VERIFY against institution's country risk matrix]
   • Note any policy exceptions required and the justification for each

5. Compile the approval package

   • Assemble the CAM with standard sections: Executive Summary, Borrower Overview, Financial Analysis, Deal Structure, Risk Assessment, Recommendation
   • Attach supporting exhibits: financial spreads, collateral schedules, organizational charts, covenant compliance calculations, third-party reports
   • Include a clear recommendation (Approve / Approve with Conditions / Decline) with the specific approval authority level required [VERIFY delegated lending authority limits]
   • Route to appropriate approvers based on aggregate exposure and risk rating per the institution's credit authority matrix

6. Track and follow through

   • Log committee questions and any conditions of approval (e.g., "Approval subject to receipt of updated appraisal within 60 days")
   • Ensure all conditions precedent are satisfied before funding
   • File the executed package in the credit file with an index for regulatory examination readiness

Output

The completed credit approval package should contain:

• Executive Summary (1 page): Borrower name, facility summary, recommendation, key risks, and mitigants
• Borrower Overview (1–2 pages): Entity background, management, industry positioning
• Financial Analysis (2–4 pages): Spread summaries, ratio analysis, trend commentary, projections if applicable
• Deal Structure (1–2 pages): Terms, covenants, collateral, guaranty details
• Risk Assessment (1–2 pages): Risk rating rationale, identified risks with mitigants, policy exceptions
• Recommendation: Clear approve/decline with conditions and authority level
• Exhibits: Financial spreads, collateral schedules, org charts, third-party reports, covenant compliance worksheets

Quality Checks

• All financial ratios tie back to the spread and source financial statements — no orphaned calculations
• Proposed risk rating is consistent with the ratio analysis and qualitative factors presented
• Covenant levels are calibrated to actual borrower performance (not so tight they trigger immediately, not so loose they provide no protection)
• Collateral advance rates conform to institutional policy [VERIFY policy manual for current advance rate limits]
• Aggregate exposure (including contingent facilities like LCs) is calculated correctly for determining approval authority
• Any policy exceptions are explicitly identified with compensating factors — never buried in narrative
• Trade finance-specific packages include confirmation of approved bank/country lines [VERIFY country and bank line availability]
• The recommendation section contains no ambiguity — the ask and the answer must be unmistakable