Risk adjusted Lending Conditions

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480 6.24 0.69 5.23 8.19 520 0.40 0.04 4.55 5.67 48.75
490 6.78 0.75 5.29 8.49 510 0.25 0.03 4.53 5.27 49.04
Combination of Loans 117
Table 9.3 Final results
House A House B
Mortgage 460 540
Risk �" 0.58% 0.11%
Rating BB A
Rating risk (Table 2.1) 0.757% 0.171%
Risk-free rate of interest 4.5% 4.5%
Mortgage interest rate 5.297% 4.697%
Mortgage interest rate rounded up 5 5/16% 4 11/16%
That House B in this example in the case of finance that is at its most favourable in terms
of interest costs is mortgaged at a much higher rate than House A, although its market value
is significantly lower, is connected with the much lower volatility of the market value of House
B in comparison with House A. The figures for this example were deliberately chosen to obtain
results that would be as illustrative as possible.
Part IV
Implementation in Practice
Implementation in Practice
Procedure according to the model for assessing the risk
in lending to a company
Applications
Final considerations
10
Procedure According to the
Model For Assessing the Risk in
Lending to a Company
In the normal course of events representatives of the lending bank discuss their business
with representatives of the loan receiving company at least once per annum, with the aid
of annual and/or intermediate accounts. We will demonstrate in this chapter how to proceed
in this, in order to be able to find out about the necessary model parameters as reliably as
possible.
10.1 OVERALL VIEW OF THE PROCEDURE
The following values have to be ascertained using equations (7.37) and (7.38): debt rate,
volatility of assets and term of loan.
The debt rate is worked out as the quotient of the outside capital divided by the value of the
assets. The value of the outside capital is taken from the balance sheet. The value of the assets
is determined, according to subsection 7.4.1, on the basis of the discounted future free cash
flows. The free cash flows achieved in the past provide a clue for these, which must in turn
support a forecast of the future asset values. The discount rate results from the CAPM. As was
explained further in subsection 7.4.1, the value of the assets may never be smaller than their
liquidation value. A check must therefore be made as to which of the two values is the greater
(discounted free cash flows or liquidation value).
The volatility of the assets results from analysis of a range of annual accounts and budgets.
It follows from this that there must be a track record in terms of annual accounts for there to
be any successful loan analysis. Budgets should be brought into the calculations too, in order
to take account of influences that may come to bear on volatility in the future.
The following documentation must therefore be brought together for the loan assessment:
A complete set of the company s past accounts, it being unimportant whether they are annual,
six-monthly or quarterly accounts, as long as they have been drawn up according to the same
principles. An important question here is how far back into the past to delve. One answer
to this question is as far as possible, in order to obtain the broadest possible statistical
basis . Another answer is: only so far as the company s past operational situation lines up
with its current operational situation, in order to avoid bringing into the assessment any
factors that are now no longer relevant . So the answer to the question of how many sets of
accounts from the past should be included in the assessment is far from trivial, and does in
fact have to be answered afresh on each occasion.
122 Risk-adjusted Lending Conditions
Reliable budgets for the future. Here more value should be ascribed to reliability than to any
far sight into the future. Clear ideas ought, however, to exist at least for the current and for the
following financial year. If not, one is entitled to raise the question of whether the company s
management has sufficient specialist capabilities for the company to be credit-worthy at all.
The necessary figures, according to CAPM, for determining the discount rate: return on the
market, yield of a risk-free investment in government bonds, and the extent to which the [ Pobierz całość w formacie PDF ]

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