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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 (ii) have an existing facility withdrawn or reduced.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
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
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