Loan Structuring, Pricing, and Documentation
What the exam tests
This domain tests whether you can design a facility that fits the borrower's cash cycle while protecting the lender: tenor, repayment profile, moratorium, covenants, security, conditions precedent, and a risk-based price.
Core rules
- Match tenor and repayment to the asset being financed; a machine should not be repaid from a bullet after its useful life.
- Structure covenants that are measurable and testable: DSCR, leverage, minimum shareholders' funds, negative pledge, and information undertakings.
- Price on a build-up: cost of funds, operating cost, expected loss, capital charge, and target margin.
- Documentation must include conditions precedent, representations, covenants, events of default, and perfection of security.
- Security must be registrable and enforceable; an unperfected charge is weak protection.
Worked example
Cost of funds 9%, operating cost 2%, expected loss 1.2%, capital charge 2.5%, target margin 2% gives a build-up price of 16.7%. If the relationship manager quotes 14% to win the deal, the facility earns less than the risk-adjusted hurdle and consumes capital without adequate return. At 16.7%, the pricing covers expected loss and the cost of capital; a waiver below that should require documented approval.
Traps
Quoting a margin without expected loss or capital; ignoring repricing and prepayment risk; drafting covenants with no testing mechanics; accepting security that cannot be perfected; and signing before conditions precedent are met. Also check that fees and taxes are reflected in the all-in return.
Key points
- Repayment profile should follow the borrower's cash cycle.
- Price includes expected loss and capital, not just cost of funds plus margin.
- Covenants must be measurable, tested, and reported.
- Security is only as good as its perfection and enforceability.