Corporate Banking: Credit Assessment, Facility Structure and Covenants
Corporate Banking (domain 1)
The Corporate Banking domain tests lending to and managing relationships with business borrowers. Expect questions that require you to read a set of financials, identify the repayment source, and defend a facility structure and covenant package.
Core rules and concepts
- Repayment logic first. Every facility needs a primary repayment source (operating cash flow) and a secondary source (collateral, guarantees, sponsor support). Collateral does not fix a weak cash flow case; it only mitigates loss given default.
- Debt metrics. Net debt/EBITDA measures leverage; EBITDA/interest measures interest cover; DSCR measures cash available after capex and tax against interest plus scheduled amortisation. Definitions of "debt" and "EBITDA" must match the credit agreement.
- Facility fit. Overdrafts and revolving credits fund seasonal working capital and are repayable on demand; term loans fund assets with matching useful life; letters of credit and guarantees support trade and performance obligations without lending cash.
- Working capital gap. Inventory days + receivable days − payable days gives the operating cycle in days. The peak funding need, not the average, sizes the revolving line.
Worked example
A borrower reports EBITDA 12m, net debt 36m, capex 2m, tax 1m, interest 3m and scheduled amortisation 3m. Leverage is 36/12 = 3.0x. DSCR is (12 − 2 − 1)/(3 + 3) = 9/6 = 1.5x. Against a 1.25x covenant the headroom is 0.25x, but if EBITDA falls 10% to 10.8m, DSCR becomes (10.8 − 3)/6 = 1.3x - still compliant, though leverage rises to 3.33x. The reasoning matters: capex and tax are deducted because they rank ahead of debt service, and using net rather than gross debt flatters leverage only if cash is genuinely unrestricted.
Traps that cost marks
- Accepting EBITDA add-backs without testing whether they are recurring.
- Sizing a revolver on average, not peak, working capital.
- Confusing a guarantee with a letter of credit, or an on-demand bond with a documentary collection.
- Writing covenants that the borrower's own accounting policies can redefine.
- Treating collateral value as the primary repayment argument.