The five criteria for credit analysis
Character – This refers to a person’s subjective assessment of a company’s ability to repay a debt.
The most crucial of the four characteristics.
Capacity – This refers to the borrower’s ability to repay the loan with the money he makes from his investments. `
Collateral (or guarantees) – Security that the borrower offers to the lender to allow the lender to appropriate the loan if it is not repaid from the returns determined at the time the facility was made available.
Covenants – Covenants are of below types:
▪ Affirmative Covenants: Require the borrowers to take certain actions including o Using debt for stated purpose
o Regular and on time payment of interest amount
o Follow business continuity, laws, and regulations
▪ Negative Covenants: Restricts borrowers from taking certain actions
o Payment of dividends
o Certain restrictions on raising additional debt (D/E ratio limit, min coverage ratio) o Restrict asset sale, certain investments
o Restrict M&As
