Apply principles of credit and lending in the banking sector

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Reference no: EM13341757

By completing this assignment you will demonstrate your ability to: 

• Collaborate and work as a member of a team, contributing to specific project tasks as agreed with other members of your team; 

• Locate, analyse and interpret information to solve specific problems; 

• Use the information to draw conclusions, make judgements and produce recommendations; 

• Produce a document that is ‘fit for purpose’, i.e., the work is written in a style that suits the intended audience, is easy to understand, is formatted correctly, and represents key data and information using appropriate charts, graphs, and/or other visuals; 

• Apply time management skills to meet project milestones, and the assignment deadline; and, 

• Apply principles of credit and lending in the banking sector, to analyse and produce recommendations on a lending application by a corporate client. 

Section A: Background 

You are an employee of Solutions Plus Bank, a major Australian financial institution, currently employed in Solutions Plus Bank’s Institutional Banking division. The division is responsible for managing Solutions Plus Bank’s relationships with major Australian corporations. Such relationships can include providing lending facilities, trade finance, money market and foreign exchange services, transaction facilities including payroll and electronic banking services for the corporation’s client relationships. From interest income and fees for service the institutional banking division is able to generate a healthy contribution to Solution Plus Bank’s annual profit. 

Competition between the major Australian banks for institutional business is high, with a consequent impact on the pricing of facilities provided. This is particularly true for lending facilities where margins have been significantly reduced by two major developments: 

Globalisation of financial institutions 

Development of alternatives to traditional lending through the maturing of financial markets 

Despite these competitive conditions Solution Plus Bank is keen to expand its presence in the institutional banking sector of the financial system, and has been actively seeking new corporate clients. It has recently received a number of submissions from major companies looking to alter their financing arrangements. (These are detailed in the Section below). 

While it seeks to win new business Solution Plus Bank executive have determined that its traditional conservative approach to accepting risk will not be compromised. Accordingly, any facility approved outside Solutions Plus Bank lending policy must contain a clear rationale for acceptance of the business including all aspects outlined in Section C. Approval for such facilities can only be given by the Solutions Plus Bank Credit Committee, comprising the Chairman of Directors and 3 other non-executive board members. 

EACH OF THE LENDING SUBMISSIONS RECEIVED FOR ASSESSMENT IS OUTSIDE CURRENT SOLUTIONS PLUS BANK LENDING POLICY. 

Section B: Project Brief 

You are part of a Corporate Lending Team employed by Solutions Plus Bank and are responsible for reviewing and assessing lending applications from large corporations and commercial clients. You have been given the task of reviewing the credit facilities sought by a major Australian company. Your recommendations in the written lending submission will go to the Directors Credit Committee for approval or rejection. The format your team will use for the lending submission is the standard layout used by Solutions Plus Bank (see below). Your group must select from the list of bank clients provided below. 

Things for consideration 

The request for funding is hypothetical, although your lending submission is based on a real company listed on the Australian Stock Exchange. 

Your predominant source of information for your lending submission will come from the company’s website. However, you are expected to obtain relevant information from other sources when providing an analysis of the operations of the company in question. For example, you will need to consult industry association reports and commentary about industry analysis provided by various banks and from other sources. 

Use the latest annual report available for your lending submission. When analysing the historical financials use the last three years. 

You may gather information and be able to write in excess of the word limit, but it is extremely important you are clear, concise and focused. 

The report should not exceed 3500 words (excluding tables etc). 

You may use any pricing model to determine the interest rate on the proposed funding. Various pricing models will be discussed in class. 

Central to your groups report is risk assessment and ways your group can mitigate these risks. 

While you will be required to do some number crunching, the majority of marks will be allocated to the quality of analysis. Remember to look for trends and changes that have occurred. 

NO extensions will be granted unless supported by appropriate documentation prior to the due date. 

Note Submissions not using the Harvard system, showing no evidence of research for information or are obviously plagiarized will be returned unmarked. 

Due date: Week 12 (to be handed in during lecture/seminar). 

1. Nexus Energy: Energy You have decided to explore the possibility of lending to Nexus Energy $50 million. Nexus Energy has indicated it will use the funds to develop (based on preliminary reports) a new gas field off the coast of Western Australia. https://www.nexusenergy.com.au 

2. JB Hi-Fi: Retailing You have decided to explore the possibility of lending to JB Hi-Fi $30 million. JB Hi-Fi has indicated it will use the funds to open up a number of new stores around Melbourne. https://www.jbhifi.com.au 

3. BHP : Materials You have decided to explore the possibility of lending to BHP $300 million. BHP has indicated it will use the funds to explore new fields in PNG. 

4. WESTFIELD CORPORATION (WFD) : Real Estate $100 million 

5. BLUECHIIP LIMITED (BCT) : Technology Hardware & Equipment $100 million 

6. VMOTO LIMITED (VMT): Automobile & Components $100 million 

7. WATERCO LIMITED (WAT): Consumer Durables & Apparel $100 million 

8. MANTRA GROUP LIMITED (MTR): Consumer Services $100 million 

9. TELSTRA CORPORATION LIMITED. (TLS): Telecommunication Services, $400 million 

10. VIRGIN AUSTRALIA HOLDINGS LIMITED (VAH): Transportation $400 million 

Section C: Lending submission 

Solution Plus Bank 

Background details What is the name of the borrower? What is their address? Who are the major shareholders/unit holders/beneficiaries? 

Overview of the borrower Whare are the current borrowings (if an existing borrower)? What is the history of this borrower? If the borrower is not an individual, then who are the individuals behind the borrower? What does the borrower do to generate income? What are some of the key characteristics of the business (number of employees, products, location, number of competitors, management, marketing and so on)? How has the business changed over time? 

Industry analysis A commentary on the industry, ending with a statement about the key success (strength) factors and key sensitivities (risks) of this industry. In this section you can also provide commentary on the state of the economy (domestic and international) and how it will affect the company you are lending to. A discussion of ways of mitigating risks should be identified where possible. 

Financial analysis Analysis of the historical financial (statements of financial position, statement of financial performance and cash flow statement). This analysis should always focus on the ultimate identification of risks (rather than on detailed quoting of numbers). Comments on the statement of financial position and statement of financial performance should be made under the broad headings of ‘short-term liquidity’, ‘longer-term solvency’ and ‘business performance’. A cash flow statement, if not provided by the customer, may be generated by the lender and discussed here. 

Security Identification of the key credit issues that come out of the existing security structure. Details should be given as to the different items of security and the lending margin that is available overall on this security. A concluding comment should be made about the strength of the second way out (security). 

Recommendation A clearly justified recommendation, including a list of relevant covenants and the strength of both the first and second ways out for the proposed borrowings should be clearly noted as either a strength or weakness. A discussion of the proposed facility structure and proposed pricing is also warranted.

Reference no: EM13341757

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