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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,

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Presentation on theme: "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,"— Presentation transcript:

1 Credit Review Office Paul Kerr

2 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

3 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 SMEs – AIB and BOI (approx. 60% of market) Commenced Operations April 1 st 2010 First cases in June 2010 Reports quarterly to Minister of Finance and weekly to DOF

4 3 Staff – Credit Reviewer, Deputy CR and Administrator Panel of 12 Assistant Credit Reviewers (paid on a case by case basis) John Trethowan Head of Credit Review Office Catherine Collins Deputy Head of Credit Review Office

5 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)

6 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 (ii) have an existing facility withdrawn or reduced.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%

7 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

8 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

9 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 Credit Review Office undertakes independent and impartial review of the credit application Outcome: an opinion on the banks credit decision. Business Viability is key Credit Review Office overturns > 50% of bank refusals

10 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

11 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

12 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 Total AIB Total 130871715249 BoI Total 1741200186 Both Banks 304991715435

13 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 Banks Credit Decision Overturned & Credit subsequently provided Jobs Protected AIB23 cases 1.8M131+9p/t27cases 2.3M218+9p/t BoI20 cases 2.0M97+13p/t26 cases 2.5M303+12p/ t Both Banks43 cases 3.8M228+22p/ t 53 cases 4.8M521+21p/ t

14 Bank finance probably not appropriate Alternatives: 3Fs 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

15 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

16 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 (3Fs) Business Angel Government Agencies:CEB/EI

17 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


19 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!!!

20 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

21 Current Position (with current debt levels) 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

22 Aim: Make this proposition bankable make a deal An art not a science! Issues for Bank: risk reduction gearing/matching funds security – pgs / assets If not bankable, point out other funding options which may depend on type of business

23 SMEs - 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

24 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

25 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

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