Credit and Banking Professor Chris Droussiotis

Transcript:Credit and Banking Professor Chris Droussiotis:
Credit and Banking Professor Chris Droussiotis Summer 2019 Banking - Overview Commercial Banking / Retail Banking Intermediary between customers who save money and customers who borrow money Taking Deposits Investment Banking Broker/Dealer Underwrite Initial Securities – Raising Capital Sales and Trade (Stock, Bonds and Derivatives) Advice Mergers & Acquisitions – Valuation Raising Capital Research / Recommnedations Banking Overview FRONT OFFICE Customer facing services Corporate Finance: Underwrite, Lending / Investing (Primary Market) Sales & Trade – (Secondary Market) Advisory and Research MIDDLE OFFICE Risk Management Market Risk Credit Risk Operating Risk Liquidity Risk BACK OFFICE Operations / IT (Technology) & Compliance Corporate Banking & Credit Overview Corporate Banking Underwrite & Lending (Primary or Capital Market) Equity Markets (IPO) and Follow-on offering Debt Markets Corporate Bond Markets Private Placement Markets Loan (Credit) Markets Credit Markets 4 Investment Grade Loan Market Rated BBB- and Higher (Corporate) Arrangers hold Higher Exposure ($200 million +) The majority of the Syndicate are traditional banks Leveraged Loan Market Rated BB+ and Lower (Corporate) Arrangers hold Lower Exposure – thus the need to syndicate The majority of the Syndicate are non-banks (Financial institutions) Leverage Loan Market purpose: Leverage Buyouts (LBO) Acquisitions using substantial debt Refinancing Typical Internal Analysis Process by Credit Analyst Internal Application sent to their respected investment/credit committees. This application includes the following: Requested amount that is within the rating parameters for each bank Recommended amounts by Tranche (Revolving Credit / Term Loans) Term and Conditions of the Loans (includes pricing, structure and covenants) Profitability (RORA and RAROC) Syndication strategy Transaction discussion including Source and Uses and Capital Structure Company discussion including historical performance and outlook Corporate Structure Management Biographies / Equity Sponsor Profile Collateral Analysis Industry Analysis Financial Analysis (Projections’ Model) Internal Rating Analysis Internal Legal Review KYC (know-your-customer) and Compliance Review Credit Markets 18 Typical Internal Rating Analysis Most banks’ internal ratings are in line with the Agencies’ external ratings, though the analysis is done independently. This analysis is based on two approaches: Quantitative Analysis Qualitative Analysis Credit Analysis Overview 19 The Quantitative Analysis for establishing the Internal rating which measures the probability of default is based on the following parameters (each component is weighted at a specific level of importance): Leverage Ratio - the relationship between debt and earnings (i.e. DEBT / EBITDA) Capitalization Ratio – the relationship between the bank debt and the rest of the capital (Capital Leases, Bonds, Equity) Coverage