This lesson explores the legal and operational components of credit agreements, including documentation requirements, security arrangements, and loan structuring principles.

6.1 The Purpose of Credit Documentation

Credit documentation establishes the legal foundation of the lending relationship and is critical for effective credit management . Proper documentation serves multiple purposes :

  • Establishes the borrower’s obligation to repay

  • Defines terms and conditions of the credit facility

  • Protects the lender’s rights in default

  • Ensures compliance with regulatory requirements

6.2 Key Documentation Components

Comprehensive credit documentation includes:

  • Loan Agreement: Master agreement outlining terms, conditions, and covenants

  • Promissory Note: Formal promise to repay the debt

  • Security Documents: Legal claim over collateral (mortgages, security agreements, pledge agreements)

  • Guarantees: Third-party promises to repay if the borrower defaults

  • Subordination Agreements: Priority of claims among creditors

6.3 Security and Collateral

Security or collateral is a critical element of credit management . Key considerations include:

  • Types of collateral (real estate, accounts receivable, inventory, marketable securities)

  • Valuation and perfection of security interests

  • Legal requirements for different collateral types

  • Monitoring of collateral adequacy

6.4 Loan Pricing and Structuring

Credit pricing and structuring principles include :

  • Risk-based pricing and interest rate determination

  • Repayment schedules and amortisation structures

  • Working capital assessment methods (Turnover Method and MPBF Methods) 

  • Term loan characteristics and DSCR calculation 

  • Insurance premium calculations and security coverage ratios 

PreviousNext