Early Warning Signals in a Construction Borrower
A mid-corporate construction borrower has a 2.4bn term loan and a 600m overdraft. For 90 days the overdraft has averaged 95% utilization. Two installments were paid 7 and 12 days late. The company has 45m in tax arrears and two directors resigned in the last quarter. The auditor issued a qualified opinion on revenue recognition. Sector-wide payment delays have risen to 120 days. The borrower is 1.1% of the bank's loan book, but construction is 28% of total loans against a 25% portfolio limit. The early warning framework requires any two red flags to be placed on the watchlist within five days and reviewed for downgrade. The relationship manager says the delays are administrative and the overdraft is seasonal. The account is currently classified as performing.
1. Identify and rank the early warning signals, and decide whether watchlist and downgrade actions are required.
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EWS ranking. Highest severity: qualified audit opinion on revenue recognition and 45m tax arrears, because they question the reliability of financial statements and signal liquidity/legal risk. Next: two director resignations, which may indicate governance or disagreement; overdraft utilization at 95% for 90 days, showing reliance on short-term funding; two late installments; and sector payment delays of 120 days. This is at least five red flags, well above the policy threshold of two. The account should be placed on the watchlist within five days and reviewed for downgrade. The RM's explanation of administrative delay is not sufficient given the audit qualification and tax arrears.
2. Recommend immediate account actions and a portfolio-level response to the sector limit breach.
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Immediate actions. Freeze new facilities and reduce the overdraft limit; request a 13-week cash-flow forecast, tax clearance plan, and aged receivables/payables; meet management and the auditor; obtain an independent review of revenue contracts; check for unpaid statutory debts; review covenants and consider a downgrade of at least two notches to special mention; reassess provisioning. Set triggers: OD utilization >85%, any payment >5 days late, tax arrears not cleared within 30 days, or further director resignation. Portfolio response. Construction is 28% of loans against a 25% limit, a breach. Stop new construction approvals, require risk-committee approval for exceptions, set a reduction plan to bring exposure below 25% within two quarters, and stress test the top 10 construction borrowers for a 120-day payment delay. This borrower is 1.1% of the book, but the sector breach is the larger concentration issue.