Credit Review Office

Paul Kerr

The Credit Review Office is here to help SMEs & farms access bank finance.

We are employed by the Department of Finance, under the section 210 of the NAMA act.

We are a team of experienced (retired) lending bankers, chartered accountants and Enterprise Development Agency staff.

Primarily we work with AIB & BoI borrowers, but also have contacts in Ulster Bank (RBS Group)

This covers @ 75% of the SME / Farm market in the Republic

CLIP

What is the Credit Review Office

2009 – NAMA legislation / recapitalisation of banks

Additional Goal – ensure flow of credit to small business

5 Banks eligible (BOI, AIB, Anglo, Irish Nationwide, EBS)

2 lending to SME’s – AIB and BOI (approx. 60% of market)

Commenced Operations April 1st 2010

First cases in June 2010

Reports quarterly to Minister of Finance and weekly to DOF

History & Operations

3 Staff – Credit Reviewer, Deputy CR and Administrator

Panel of 12 Assistant Credit Reviewers (paid on a case by case basis)

John TrethowanHead of Credit Review Office

Catherine CollinsDeputy Head of Credit Review Office

Staff

Two Aspects:

1) Credit Review Process-ensure viable businesses get credit (like commercial ombudsman)

2) Monitoring and reporting banks target of lending €3bn each in 2010 and 2011 (€12bn in total)

Objective

The Credit Review Office may be able to help, if a borrower believes that they have been wrongly:

(i) refused credit - new, or additional facilities, up to €500K. (ii) have an existing facility withdrawn or reduced. (iii) have had fees or interest increased to unreasonable levels.

The appeals process is ‘borrower initiated’

Step One- Internal Bank Appeal We will have the bank take another look at the case – in some cases this results in an immediate resolution of the case

Step Two – Credit Review Office Appeal If this is unsuccessful we work with the borrower to:

(i) In some cases recommend a straight overturn of the banks’ decision (ii) Understand (and possibly correct) why the bank has said ‘no’

(ii) Try to structure an alternative deal acceptable to the bank We currently have a ‘step two’ success rate of over 50%

What we do

Applications for new loans or restructured credit facilities up to €500K (€500k incremental borrowing, not existing level of debt)

EU SME Criteria: Up to 250 employeesT/O up to €50M+/Or Balance sheet value €43M

Company/sole trader/partnership

Review Process

Borrower has a written application that was

RefusedOffered reduced amountApproved but with attached terms and conditions making

loan unacceptableOr existing credit facilities removed

and borrower believes bank actions unfair

Eligibility

Borrower asks for decision to be appealed through banks internal appeals process

Both banks have dedicated appeals unitIf Internal Appeal overturns initial decision:

no Credit Review Office case

Credit Review Office undertakes independent and impartial review of the credit application

Outcome: an opinion on the bank’s credit decision. Business Viability is key

Credit Review Office overturns > 50% of bank refusals

Application

Assistant Reviewer undertakes independent and impartial review of the credit application, may seek additional information, then presents case to committee

Output – written opinion to issue to bank, seeking Bank Next Actions

Opinion and Banks actions issued to borrower

Credit Review Office Credit Committee Meeting

Lists all info provided by both bank and borrower

Comments on behaviour of bank-history with borrower,

timeliness, terms and conditions(price, security etc.)

Focus on Viability Financial history and projections Can borrower repay proposed lending: ‘as is’ and ‘to be’ Summary of Income and Expenditure (funding) Cash flow and working capital Capitalisation/borrowers stake/bank exposure

Conclusion and Recommendations for Borrower and Bank

Always conscious of social implications/jobs

I will discuss two case studies, one successful and one not, and how I came to the decision

in a few moments.

Credit Reviewers Opinion

Banks’ Formal Internal Appeals

Our Record to date Step 1

April to Jan2010 2012

Bank DeclineDecisionUpheld

Overturned/ Sanctioned with

Conditions Credit Made Available

Work in Progress

Ineligible/Withdrawn

By borrower

Total

AIB Total 130 87 17 15 249

BoI Total 174 12 0 0 186

Both Banks 304 99 17 15 435

Credit Review Office Interventions (re: arising from column 2 on previous slide

= 304 declines)

Step 2

Credit Review Office Appeals

Banks’ Decline Decision Upheld

Jobs at Risk

Bank’s Credit Decision Overturned

& Credit subsequently provided

Jobs Protected

AIB 23 cases €1.8M 131+9p/t 27cases €2.3M 218+9p/t

BoI 20 cases €2.0M 97+13p/t 26 cases €2.5M 303+12p/t

Both Banks 43 cases €3.8M

228+22p/t

53 cases €4.8M 521+21p/t

Bank finance probably not appropriate

Alternatives:

3F’s and bootstrapping

Business Angel/Venture capital/County Enterprise Boards/Enterprise Ireland

Microfinance – First Step, LEDP, new government fund 2012

OR mix of above plus bank funding

Start-Ups

Perfect storm over past two years-collapse of property market and domestic demand

Beyond repair Borrowing to pay bills or creditors No chance of recovery Current issues would jeopardise any future improvements

NEED TO CULL-BUT SLOWLY!Domino effect for creditors

Existing Businesses-Non Viable

Undercapitalised OR No Reserves due to non core investments

Try to separate core business (employer) and save it - park non-core if possible

Sources of Capital: Bank debt to grow profits – gearing issue Government Loan Guarantee Scheme Microfinance if rejected by banks Capital Injection:

Promoters (3F’s)Business AngelGovernment Agencies:CEB/EI

Existing Businesses-May be Viable

Part 1 - FACTS ABOUT THE BUSINESS

Basic info- contacts, banking details, legal structure, business profile, management and experience

Existing financial commitments- lending, guarantees, security pledged, pref. creditors

Details about the declined lending application-amount, term, how it will be repaid

List available accounting and financial info- audited/management accounts business plan projections aged debtors and creditors, revenue/tax clearance

Application process

Part 2 - OPINIONS ABOUT THE BUSINESS

Borrower Application Form

FACTS AND OPINIONS ABOUT THE BUSINESS

Same as for borrower: Track record with bank, existing commitments of borrower & personal commitments of principals if non-ltd business

Details about the declined lending application-amount, term, how it will be repaid

Borrowers stake Hardcore borrowing Financial info-turnover trend, profit margins, net cash flow Cost of borrowing Reason for decline

Bank & Borrower ‘Facts’ - ALMOST NEVER AGREE!!!

Bank Form-make the bank do the work

Assessing viability / ability to repay

What market is the enterprise involved in-growing or declining?

Promoters Experience/Capability Past Performance - historic profit/cash flow (past 2 years may not be indicative) Future Potential - projected profit/cash flow have steps been

taken to improve situation Performance against projections so far Sales pipeline Aged Debtors and Creditors Statement of Assets and Liabilities of promoters

Case Assessment Breakdown

Current Position (with current debt levels)

Historic and projected Turnover, Profits, Gross and Net MarginsWhat is the trend?

EBITDA – approximation for cash generation of the business Working Capital: trends, payment arrangements, stock

levels Is the business undercapitalised or overtrading? Decouple core business from non-core

can the business survive?

Viability can it service the loan?

Aim:

Make this proposition bankable

‘make a deal’ An art not a science!

Issues for Bank:risk reduction gearing/matching fundssecurity – pg’s / assets

If not bankable, point out other funding options which may depend on type of business

Opinion issued to borrower

Seeking €500k loan over 12 months 20 year family run business servicing the construction

industry and they survived the downturn in the economy through shrewd business decisions.

In negotiation to write off bank debt of €1.45m with one bank with loan of €500k from the bank in question.

Business wants to develop new site to move business and change direction by targeting a different market. Loan is intended to free up capital after bank write off deal.

All planning is completed and site already in development. The borrower intends to repay loan over 10 year period

through sales or from sale of personal assets. Bank refused application because of Bank policy on sites

that require further development and that they consider application in its totality so they can assess the full risk

Case 1 (Successful) - Background

Business in operation for 20 years and between the borrower and family members they have nearly 60 years’ experience in the industry.

Full planning permission obtained and redevelopment work started on site.

20 year history with bank with an impeccably controlled account, they never had any issues.

Borrower strongly demonstrated its ability to survive the downturn and shows potential for strong growth.

Strong business plan prepared for relocation of premises and all necessary documentation provided to make an informed decision.

Business rebranded itself and became a Ltd company in anticipation of the move and change in direction.

Profitable business and in good standing to service the loan. Selling assets including current premises to develop site in

question. Cash flow is not an issue.

Strengths of application

Debt with another bank that is in the process of being written off but is not finalised

Possibility of not selling personal assets in current market

Bank unsure of how overall project funding will be structured

Weaknesses of application

Borrower has the capacity to repay the loan. Positive outlook displayed for both profitability and growth of the business

Opportunity of debt write-off, thus immediately improving viability of entity and is in the final stages.

Risk for bank can be mitigated if they are open to it. There is access to considerable personal security here which could support this proposition and reduce/remove risk and improve viability.

 

Reason why we supported the appeal

Seeking €15k loan over 60 months 10 Years as a sole trader Business is currently borderline overcommitted to its

current lending obligations Stable business with growth not anticipated aligning with

previous years Requesting loan of €15k from bank where it does not have

an account with, information provided show it operates a ‘cash type’ business

Loan is required to pay current lending obligations and debt arrears

Case 2 (Unsuccessful) - Background

Stable Business in existence for 10 years

Small profitable business c€27,000 per annum

Strengths of application

Poor application to begin with, little information provided No business account existing with bank Currently in arrears on existing HP & Leasing obligations Poor ICB History with a history of unpaids No demonstration of ability to repay Basic errors made in subtraction in the accounts to

30/12/2009 gross profit which is a little concerning No figures provided for 2011 Repaying current debt on his own terms rather than set

out in the HP & Lease agreements No security provided and high risk to bank Was turned down in another local branch of which he is

applying for loan of the same amount.

Weaknesses of application

No repayment capacity demonstrated Poor ICB history showing borrower already overcommitted

severely impacts application No working business account available to make judgement

on account performance Already declined by another local branch of the same bank. Poor application with little information provided and simple

errors in accounts provided No assets sufficiently liquid as borrower heavily committed

to HP & Lease agreements  

Reasons why we upheld the banks decision

SME’s - Fail to prepare, prepare to fail – importance of business planning and forecasting

Banks - need to work on deal-making

Tiger Effect: Lazy Borrowers and Lazy Lenders

Some Findings

Most cases are restructuring, not ‘new new’ money

Legacy issues – working capital used for capital items

Legal issues - Bad decisions made under pressure, not bad people

Issues of Reserves/Capitalisation/Security (BTL)

Cost of Funds increasing- interest rates charged increasing

Demand is subdued at present but availability and Cost of Working capital will be key when demand

strengthens and companies need to expand

Continued….

1 out of every 2 credit applications refused by the bank are overturned by the Credit Review Office

Helpline advice can resolve issues without a formal process

Watchdog effect – banks looking more closely at their decisions

Thanks for Listening

Conclusion