Learning Objectives:

  • Structure a loan to meet borrower needs and manage bank risk.

  • Identify key loan documentation requirements.

  • Understand loan pricing and covenant design.

4.1 Loan Structuring Principles

Loan structuring involves designing a loan that meets the borrower’s needs while protecting the bank’s interests . Key considerations include the loan amount and purpose, repayment schedule, collateral, covenants, and maturity . Matching structure to purpose aligns loan term, amortisation, and repayment source with the borrower’s use of funds. Mismatched structures are a primary source of credit risk .

4.2 Loan Documentation

Proper documentation is essential for legal enforceability. Key documents include the loan agreement, promissory note, security documents, guarantees, and subordination agreements . The credit approval and documentation process involves due diligence, verification, loan closing, and document execution . Writing the credit memorandum structures a persuasive, fact-based credit memo that supports the approval recommendation .

4.3 Loan Pricing and Covenants

Loan pricing determines the interest rate and fees charged to the borrower. Pricing considerations include the cost of funds, risk premium, profit margin, and market competition . Covenants are legally binding terms and conditions imposed to mitigate risks and ensure repayment . Covenant design and monitoring includes structuring financial and non-financial covenants that provide early warning of borrower deterioration .

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