Question:

a) NLTF= Mur150m; WCN= 146m; Liquidity= 14m

b) Balance Sheet has been solidified by loan from the Holding Company. Had the loan not been provided, the negative capital would have played against the company. The loan from holding company carries no interest and has no fixed repayment date. Hence, it can be considered as quasi-capital, thus help consolidate the capital position. The Net Long-term funds are Mur150m, and the working capital needs amount to Mur146m. This means that almost 95% of the working capital needs have been financed internally (i.e. funds from the company and the Group). Only, a small amount of short-term loans has been needed up to now.

c)

Returns= Mur9.1m

Risk-adjusted credit=

(Mur50m*100%)+(Mur300m*50%*50%)+(Mur50m*20%)=

Mur50m+75m+10m= Mur135m

Raroc= {Mur 9.1/(Mur135*10%)}*100= 67%

Actual Raroc being higher than hurdle rate, the facility will be accepted.

d) Both Overdraft and Bills Aval Line are short-term working capital facilities. The Internally generated funds needs to finance at least 25% of the total working capital needs of a company. In the present case, the net long-term funds amount to Mur150m, the total working capital needs amount to Mur146+Mur50m= Mur196m. The net long-term funds still finance more than 25% of the working capital needs.

The specific covenants would be to put a limit on the repayment of loan from the holding company until the banks debts are repaid (I.e. subordination of debts); this will allow capital to be maintained inside the company. Credit risk mitigation, would be to request assignment of funds payable by the Ministry of Housing on the books of MCB Ltd.