Why Should ACBC Want To Be Given A Copy Of Pupper Under The Term Sheet

[1 point] What is the purpose of credit analysis?

The purpose of credit analysis is to check whether the company can meet its debt obligations. Lending parties, before shelling out money for borrowers, must ensure that the borrowing party has a high probability of repaying their debt, based on their capacity, collateral, covenants, and character.

[1 point] Look at the affirmative covenants of Pupper under the term sheet. Why would ACBC want to be given a copy of Pupper’s financial statements annually? ACBC requires to have a copy of Pupper’s financial statements annually so that they can check and track whether or not Pupper can still keep its covenants and pay their debt on time. The financial statements give a snapshot of the company’s
By doing an analysis when interest rates increase, ACBC can assess whether Pupper Corp. can still meet its covenants by the end of the term of the loan. In addition, the repayment schedule can also be revised in order for ACBC to yield higher interest income. Stress testing is important in order to examine whether the borrower can still pay the loan subject to extreme events. It takes into consideration the risks, particularly unexpected risks, that might arise during the term of the loan.

[2 points] If you were Pupper’s CFO, would you agree with the proposed maximum D/E ratio? Justify your answer.

Based on the pro forma analysis, the D/E ratio is at its highest in 2018, where it was 1.97x. This value is very near 2.0x, thus, if we were Pupper’s CFO, we would increase the value of the proposed maximum D/E ratio to either 2.05x or 2.10x. This is due to the fact that the financial statements for 2018 onwards are just forecasts; a slight deviation against the pro forma financial statements would cause the D/E ratio to be higher, which will put Pupper at a disadvantage. Thus, it would be better to give a small amount of “allowance”, which is attributable to the uncertainty implicit in the pro forma analysis.

[2 points] Currently, the minimum required DSCR is left blank. If you were Pupper’s CFO, what level of minimum DSCR would you propose? Justify your
By setting the payment in 2023 to be lower, the equal payments for the first 5 years will be greater (i.e. from Php5.4mn to Php5.8mn), thus decreasing the amount outstanding in the facility every year, which increases CCR. Alternatively, the CFO can ensure an above-minimum CCR by decreasing the amount to be borrowed from the facility (i.e. from Php30mn to Php28mn). Through this, the amount outstanding will also be decreased, and the CCR will increase.

[2 points] The questions above address the first 3 C’s of credit analysis—capacity, covenants, and collateral. Give two things that would cause ACBC to doubt Pupper’s character, the last C of credit analysis.

Two possible things that would cause ACBC to doubt Pupper’s character is (1) proposed financial statements and covenants have grossly understated/overstated parts, which hints at the inexperience of the CFO (and by extension, the management) and will negatively affect their agreement, and (2) if one of their previous borrowings led to a technical default or a violation of the