Corporate-LendingMedium

3 min read · 538 words

What the seat actually does

This seat lends money to companies. Not through a bond market with hundreds of buyers, but as a loan the bank writes, negotiates and usually keeps part of.

The loan is rarely the point on its own. A corporate relationship is a bundle — the loan, the accounts the company's cash moves through, the hedges it puts on, and the fee business when it buys something. The loan is the entry ticket, priced accordingly, and the rest is where the return is expected to come from. That is worth saying plainly because it explains pricing that otherwise looks irrational.

• Cash-flow lending — against what the business earns, with covenants that test it. See leveraged loans.
• Asset-based lending — against receivables, inventory or equipment, where the security is counted rather than forecast.
• Syndication — arranging a loan too large for one bank and selling the rest of it down.
• Amendments, which is most of the work after year one. See amend and extend.

A day, and where it goes

• Credit papers — the case for a new facility, written for a committee that will read the downside first.
• Covenant compliance, quarter by quarter, and which borrower is heading towards a test it will not pass.
• Documents. The credit agreement is the product. See reading one.
• The relationship — what else the company needs, and which of the bank's other desks should be in the room.

What it is measured on

• Return on the capital the loan consumes, counting the whole relationship rather than the loan alone.
• Credit quality — migrations, provisions and losses, which arrive years after the decision.
• Share of the client's business, which is the honest measure of what the cheap loan bought.
• How the document held. A recovery is decided by what was negotiated, not by what was intended.

What it touches on this site

• The instruments — leveraged loans, Schuldscheine and factoring.
• The alternative — a bond against a loan, and the DCM desk that would sell the bond.
• When it stops being repaid — the restructuring desk and who gets paid.
• When it goes wrong — 2017, where the lenders were right about the business and late about the calendar.

How it goes wrong

• Lending to win the relationship. A loan priced as a loss leader is still a loan, and it defaults on the same terms as any other.
• Covenants competed away. When credit is easy the tests loosen, and the tests are what gives the bank a seat at the table.
• Forecast collateral. Cash-flow lending secures against a projection; asset-based lending secures against something countable, and the difference shows up exactly once.
• Structural subordination nobody drew. Lending to a holding company that owns nothing is not lending to the business.

Concepts to master

• A covenant is a right to a conversation, triggered early enough to matter.
• Credit spreads price the same judgement the committee is making — see credit spreads.
• Leverage is the borrower's, and it becomes yours — see leverage.
• Ranking is structural as well as contractual. Where the debt sits in the group decides the recovery before any document does.