Learning Objectives:

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

• Identify key loan documentation requirements.

• Understand how to use loan covenants to mitigate risk.

5.1 Loan Structuring Principles

Loan structuring involves designing a loan that meets the borrower’s needs while protecting the bank’s interests . Key considerations include 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 .

5.2 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 Documentation Requirements and Validation Approaches” module from the SMU Academy covers “Credit Documentation at Various Stages of The Lending Process” .

5.3 Loan Covenants

Loan covenants are legally binding terms and conditions imposed to mitigate risks and ensure repayment . The Illinois Bankers Association course covers the “Effective Use of Loan Covenants” . Types include:

• Affirmative Covenants: Actions the borrower must perform (e.g., providing audited financial statements).

• Negative Covenants: Restrictions on borrower actions (e.g., limiting additional debt).

• Financial Covenants: Requirements to maintain financial ratios (e.g., minimum DSCR).