30 years: Credit risk specialist
In this video, Belinda expands on the topic of loan structuring and documentation to examine the structuring process and the steps required to design effective covenants.
In this video, Belinda expands on the topic of loan structuring and documentation to examine the structuring process and the steps required to design effective covenants.
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11 mins 57 secs
Deal structuring is important in minimising potential losses in the event of default by the borrower or counterparty. It involves creating a unique mix of components such as tenor, repayment schedule, pricing, collateral, guarantees, representations and warranties, conditions precedent, covenants, and information undertakings. The deal structuring process can be divided into three stages: the design stage, the negotiation stage, and the drawdown and monitoring stage.
Key learning objectives:
Define deal structuring
Understand the deal structuring process
Outline the steps required to design effective covenants
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Deal structuring is a process for managing credit risk that involves more than just agreeing on the commercial terms of a debt facility. It involves designing effective covenants and creating documentation that minimises the severity of loss in the event of a borrower's default. Deal structuring provides the lender with a measure of control over the assets, contracts, and cash flows of the borrower or counterparty and gives early warning signs of any deterioration in the borrower's credit risk profile. By ensuring that the documentation and security arrangements are enforceable in case of default, deal structuring helps lenders effectively manage credit risk.
The deal structuring process involves three stages: design, negotiation, and drawdown and monitoring. The purpose of deal structuring is to mitigate credit risk and minimise potential credit losses by considering factors such as probability of default, loss given default, and exposure at default. An effective deal structure should provide early warning signs of an increase in credit risk and protect against an increase in Loss Given Default. The structure should also include components such as collateral, guarantees, representations and warranties, conditions precedent, covenants, and information undertakings that are negotiated on a case-by-case basis. The deal structuring process starts with the design stage, where the debt provider creates a range of acceptable options for negotiation, followed by the negotiation stage, where the term sheet is agreed upon and final documentation is drawn up for signing. The final stage, drawdown and monitoring, involves ensuring conditions precedent are completed and implementing internal monitoring plans to dynamically monitor the borrower's risk profile.
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