Transcript What is the Credit Review Office

Credit Review Office
Paul Kerr
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The Credit Review Office is here to help
SMEs & farms access bank finance.
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We are employed by the Department of Finance,
under the section 210 of the NAMA act.
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We are a team of experienced (retired) lending bankers,
chartered accountants and Enterprise Development Agency
staff.
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Primarily we work with AIB & BoI borrowers, but also have
contacts in Ulster Bank (RBS Group)
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This covers @ 75% of the SME / Farm market in the Republic
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CLIP
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2009 – NAMA legislation / recapitalisation of banks
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Additional Goal – ensure flow of credit to small business
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5 Banks eligible (BOI, AIB, Anglo, Irish Nationwide, EBS)
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2 lending to SME’s – AIB and BOI (approx. 60% of market)
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Commenced Operations April 1st 2010
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First cases in June 2010
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Reports quarterly to Minister of Finance
and weekly to DOF
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3 Staff – Credit Reviewer, Deputy CR and Administrator
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Panel of 12 Assistant Credit Reviewers (paid on a case by case
basis)
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John Trethowan
Head of Credit Review Office
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Catherine Collins
Deputy Head of Credit Review Office
Two Aspects:
1)
2)
Credit Review Process-ensure viable businesses get credit
(like commercial ombudsman)
Monitoring and reporting banks target of lending €3bn
each in 2010 and 2011 (€12bn in total)
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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.
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(ii) have an existing facility withdrawn or reduced.
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(iii) have had fees or interest increased to unreasonable levels.
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The appeals process is ‘borrower initiated’
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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
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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%
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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 employees
 T/O up to €50M
 +/Or Balance sheet value €43M
Company/sole trader/partnership
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Borrower has a written application that was
 Refused
 Offered reduced amount
 Approved but with attached terms and conditions making
loan unacceptable
 Or existing credit facilities removed
 and borrower believes bank actions unfair
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Borrower asks for decision to be appealed through banks
internal appeals process
Both banks have dedicated appeals unit
If Internal Appeal overturns initial decision:
 no Credit Review Office case
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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
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Assistant Reviewer undertakes independent and impartial
review of the credit application, may seek additional
information, then presents case to committee
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Output – written opinion to issue to bank, seeking Bank Next
Actions
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Opinion and Banks actions issued to borrower
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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
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Conclusion and Recommendations for Borrower and Bank
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Always conscious of social implications/jobs
Banks’ Formal Internal Appeals
April to Jan
2010
2012
Bank
Decline
Decision
Upheld
Overturned/
Sanctioned with
Conditions
Credit Made Available
Work in
Progress
Ineligible/
Withdrawn
By
borrower
AIB Total
130
87
17
15
249
BoI Total
174
12
0
0
186
Both Banks
304
99
17
15
435
Total
Credit Review Office Interventions (re: arising
from column 2 on previous slide = 304
declines)
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:
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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
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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
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 Angel
 Government Agencies:CEB/EI
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-
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audited/management accounts
business plan
projections
aged debtors and
creditors, revenue/tax clearance
Part 2 - OPINIONS ABOUT THE BUSINESS
FACTS AND OPINIONS ABOUT THE BUSINESS
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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!!!
Assessing viability / ability to repay
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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
Current Position (with current debt levels)
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Historic and projected Turnover, Profits, Gross and Net
Margins
 What 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
Aim:
Make this proposition bankable
 ‘make a deal’
 An art not a science!
Issues for Bank:
 risk reduction
 gearing/matching funds
 security – pg’s / assets
If not bankable, point out other funding options which may
depend on type of business
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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
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Most cases are restructuring, not ‘new new’ money
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Legacy issues – working capital used for capital items
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Legal issues - Bad decisions made under pressure,
not bad people
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Issues of Reserves/Capitalisation/Security (BTL)
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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
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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